Top global equity managers steering clear of energy and banks

In the third instalment of our global equity series, Citywire AAA rated Roger Morley and Ben Kottler, managers of MFS Meridian’s Global Equity Fund reveal why they welcome hedge fund shorting and why despite cheap valuations, they’re avoiding energy stocks.

Morley and Kotter, alongside colleagues Citywire AA rated David Mannheim, Michael Cantara and Sanjay Natarajan run the MFS Meridian Global Equity fund using a GARP strategy.

As bottom-up, long-term investors the team look for stocks that can deliver earnings per share growth at an above average rate.

‘We focus on steady businesses rather than get excited about things that are inherently unforeseeable,’ said Morley.

With a bias to higher quality earnings the team have found the market often tends to underestimate the value of quality companies’ compounding high returns on capital over long time periods.

Morley cites drinks company Diageo - one of the fund’s top holdings - as an example of this. ‘It [Diageo] may be boring but people drink Johnnie Walker today and will be drinking Johnnie Walker in another twenty years time - it’s a no-brainer,’ said Morley.

With 97 holdings as at the end of July, the fund is pretty diversified as this allows the team to invest in their highest conviction ideas whilst also reducing stock specific risk.

The fund is currently overweight retailing, consumer staples - which plays into the rise of the emerging market consumer, and healthcare which is a consequence of ageing and obesity associated with western demographics.

In contrast, the fund is underweight utilities, communications and financial services. Morley singles out the energy sector as an area where despite cheap valuations, he and the team are unwilling to venture into as ‘these are capital intensive businesses dominated by large oil majors susceptible to changes in regulation and energy price swings,’ he said.

Morley and Kottler are also bearish on financials, particularly developed market banks as ‘while earnings will grow, the topline will struggle - it’s hard to see any growth,’ said Morley.

However there are pockets in the sector that meet the team’s criteria, such as trust banks like State Street and Bank of New York Mellon which act as global custodians for many asset managers. ‘These are very good businesses that are trading at historic, depressed levels,’ said Morley.

When assessing whether or not to invest in a stock the team pay particular attention to the company’s business model, indeed they believe their understanding of them is what sets them apart from their peers and gives them the confidence to buy stocks when they are undergoing periods of stress, for instance when they are being shorted by hedge funds.