M&G star Graham French answers Citywire's questions
Graham French, who has built a loyal following as manager of the M&G Global Basics fund, explains his latest thoughts and how the fund is positioned.
by Jonathan Miller on Oct 21, 2010 at 09:36
Graham French (pictured), who has built a loyal following as manager of the M&G Global Basics fund, explains his latest thoughts and how the fund is positioned.
Can you give an overview of your style and the approach used for managing the fund?
In short, the M&G Global Basics fund represents a straightforward, thematic approach to investing in asset-rich companies that are benefiting from long-term growth worldwide. It’s a long-only, bottom-up approach whose simplicity and multi-year investment horizon stand out from the complexity and short-termism that are increasingly prevalent in our industry. Valuation and in-depth company analysis are fundamental to everything we do, so we concentrate on investing in cash-generative, capably-managed companies with strong long-term growth prospects that are under-appreciated by the broader market.
You’re ahead of the composite index during year to date. What areas in particular added value?
Fund holdings across a range of sectors have made strong contributions to performance this year. For example, Singapore-based property and beverages conglomerate Fraser & Neave, Australian rubber products manufacturer Ansell and Yum! Brands (owner of KFC and Pizza Hut) have all been successful investments, supported by the dynamic that changing consumer tastes and spending patterns in emerging markets are transforming the returns of companies that are well-positioned in these markets. In the mining sector, a particularly strong contribution also came from Australian mineral sands producer Iluka Resources.
What potential do you see in the asset class given the approach you have?
I believe strongly that an indirect, stock-specific approach to investing in faster-growing parts of the world still offers exceptional opportunities for long-term equity investors. A range of countries throughout Asia, Latin America, the Middle East and Africa are going through a multi-decade revolution as economic power continues to shift from the more developed West to the developing East. Rising wealth as a result of urbanisation and industrialisation is helping to establish an increasingly affluent middle class whose consumers are willing to spend more to improve their quality of life. Companies that understand this shift and are positioning themselves accordingly should be the winners over the next decade and beyond. Our flexibility to manage the portfolio’s exposure to these different areas has provided the invaluable capacity to take a valuation-driven, ‘best ideas’ approach to thematic investing, instead of being constrained to one sector, theme or country, an advantage that differentiates us from many of our competitors.
You were ahead of the curve in terms of investing in western companies tapping into emerging market growth. Now everyone seems to be talking about it. Has this impacted valuations giving you less attractive opportunities than in the past ?
Certainly investors have to a degree woken up to the opportunities represented by our long-established ‘indirect’ route to investing in emerging markets, so valuations for some of the more obvious beneficiaries now reflect this. As always, however, we take a stock-specific stance and we can still find many well-positioned companies whose ‘option value’ remains unrecognised, as many hundreds of millions of new customers start to use their products and services. In addition, we are not limited to an ‘indirect’ approach, although this remains the main focus of the fund: as certain companies in these emerging regions evolve in terms of their improving governance standards, we are becoming more comfortable in investing part of the fund directly, working with my colleagues at M&G who have had much success in this area.
What areas are showing most value and how are you positioning the fund at a stock / sector level to exploit this?
My strategy for the fund has continued to involve a gradual shift up the ‘curve of economic development’ into a range of companies that are well positioned to benefit from the powerful cultural and demographic shifts taking place in the global economy. These include the long-term growth of infrastructural development in industrialising economies throughout the developing world, and the rising wealth of their increasingly urbanised populations. While there remain a number of exceptional commodities-related companies whose potential for growth is under-appreciated by investors, increasingly we are finding the most interesting opportunities further up the ‘curve’ among companies that are positioned to benefit from the next leg of the emerging markets growth story.
You have been changing the portfolio recently and making it more defensive. What are the reasons for this and are you looking at further investments in gold stocks?
We do have a relatively cautious view of the current outlook, but my responsibility as a fund manager is to manage a portfolio of successful long-term investments across a range of areas so I try to move away from thinking about things purely in terms of cyclicals and defensives. Over the past six months or so, we have indeed been taking profits from certain economically sensitive holdings that had rallied very sharply from their 2009 lows, and we have been reinvesting the proceeds in a range of more attractively valued businesses that should benefit from the long-term dynamics described above. Some of these newer holdings have been defensive in nature (eg, selected cash-generative international consumer staples businesses), but not all of them. We have been adding to certain mining companies, including in the gold sector, an industry that has begun to demonstrate a genuine focus on shareholder returns for the first time in many years.
Macro data is currently giving mixed signals. How do you take this on board when selecting stocks?
While macro-economic factors should of course be taken into consideration when analysing companies, I do not take a macro view when constructing the portfolio. Of greater relevance are the powerful thematic and demographic forces at work in the world today, as economic power continues to shift inexorably from the developed world towards the developing economies of Asia, Latin America and the Middle East.
However compelling the thematic drivers, though, a focus on company fundamentals remains the crucial factor when considering potential investments. Undervalued assets, returns-focused management teams and strong adherence to corporate governance practices are prerequisites for companies held in the fund.
If we are faced with anaemic growth and challenging conditions over the next three to five years, can investors in this strategy expect returns ahead of inflation over that period?
I try to avoid making forecasts but I am optimistic about the fund’s future. I believe that, irrespective of headline numbers for the overall economy, there are parts of the world that will continue to show robust growth. Companies that are well positioned for these developments, whether they are listed in developed or developing markets, should prosper even in an environment of anaemic growth for the global economy as a whole.
I am confident that by consistently applying our long-term investment approach, irrespective of shorter-term swings in sentiment, the fund will continue to reward its investors.
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by Chris Sloley on May 17, 2013 at 14:45