James Hambro & Partners’ (JH&P) William Francklin says he is now having to factor the political landscape into his thinking for the first time in his 36-year career, following the election of Donald Trump.
Francklin joined the firm as a partner and investment manager in July, moving across from Waverton Investment Management where he spent 12 years.
A global equities specialist, with a particular focus on the US, having previously lived and worked there, he admits to being shocked by some of the missives coming out of the White House.
‘I’ve historically ignored politics, but for the first time since 1981, when I started in the business, I do think more about it now,’ he says.
‘I started looking at US equities when [Ronald] Reagan was in power. If you go back to that time until [Barack] Obama’s presidency, despite the rhetoric and some differences in foreign policy, both parties have been fairly centrist, in terms of how they managed the economy.
‘I always thought of the US as a big supertanker and the White House couldn’t affect the stock market too much. But now with Trump, in terms of foreign policy, it’s hard to analyse the risk of something completely left-field occurring.’
Francklin admits it could have been worse, noting that Trump has been unable to get the bulk of his policies through Congress.
Many of these would potentially have had a significant impact on different stocks and sectors, for example if the president had come up with an initiative for companies to repatriate the trillions of dollars they hold offshore, without facing an onerous tax burden.
Although stopping short of actively following Trump’s notorious Twitter feed, Francklin is mindful of the havoc he can wreak on companies’ share prices.
Despite his misgivings about the political landscape, it is clear that Francklin has a real passion for America. He spent two and a half years in New York (‘it’s a different world, but a very exciting place’) in the mid-1990s.
There he ran US equity portfolios while at Morgan Grenfell Asset Management, the company where he started his career and went on to spend 16 years, latterly as head of global equities for its UK institutional division.
He remains a regular visitor to America, typically crossing the Atlantic to visit companies around six times a year. But given his global remit, he also heads over to Europe at least twice a year, and occasionally visits Asia too.
Visiting companies and really getting to know the business and the management is the cornerstone of Francklin’s bottom-up approach to investing, and he says it is key to adding value in the mid and large cap arenas.
‘My philosophy is the more companies you visit, the better your investment choices are. It’s just as much about knowing what not to invest in as knowing what to invest in,’ he says.
‘I’m not a macro investor – if you are running global money you need to know which companies are growing their market share and have the best prospects for growth, and this is particularly true when markets are going through a difficult period.
‘You need to know the management, and if you know the management and know the business, you can ride out the storm and not sell at the wrong time. The biggest mistake I’ve made as an investor is underestimating the value strong management can add.’
His focus is very much on identifying world leaders in their field that are well run, benefit from high barriers to entry and have strong balance sheets.
Although reticent to discuss existing or target holdings, he cites LVMH and Richemont, which owns Cartier and Mont Blanc, in the luxury goods sector as examples of the types of companies he has previously held.
Similarly, he highlights Japanese firm Keyence – ‘it’s the leading company in the world in terms of providing factory automation to businesses, including sensors’ – as an industrial example.
He says the core of the client portfolios he runs – up to 80% – is held in these best of breed companies.
‘We will invest in cyclicals and the rest of the portfolio is in companies you might own for two-to-five years, rather than eight-to-10 years,’ he says.
For Francklin, there are two triggers that will make him sell a stock, the most important being a change in the fundamentals. He says this would typically lead him to sell the entire holding, whereas if there was a change in management, he would take time to get to know them before making that call.
‘Sometimes, like now, when stocks are very expensive we’ll top-slice when we think that the company still has attractive growth prospects, but is expensive relative to history,’ he adds.
Francklin believes the focus on quality is more important than ever, given the market backdrop as concerns mount about how much life is left in the current eight-year bull-run. Although he is not one to forecast market direction, he admits to being cautious, with several indices close to record highs.
He adds that this is making investing new money challenging, particularly when on-boarding incoming clients.
‘With new money in particular, you’ve got to be very careful how you invest it with valuations close to record highs and expensive relative to history,’ he says.
‘With new portfolios, you’d normally look to get them invested over six to nine months, but it is now going to take much longer, maybe 18 months.
‘We are very much focused on buying individual companies where you think the share price can go up in a flat market. We know some companies are very well positioned, but we don’t know where the market will go. But we do know that a lot of these companies look very expensive, so we are much happier buying them when there is red on the screen.’
Francklin says there are pockets of value around the world, most notably in Japan. Although he admits to having had zero exposure to the country ‘for long periods’, he believes that prime minister Shinzo Abe’s much heralded reforms are now starting to bear fruit.
He points out that Japanese company management is taking note of the positive share price reaction occurring when firms increase their previously meagre pay-out ratios as part of the corporate governance reform drive.
Meanwhile, the giant Government Pension Investment Fund has increased its allocation to equities from 5% to 20%, providing an additional kicker to the market, although Francklin expects the trend of increased institutional investment to be a slower burn.
‘The average Japanese pension fund still holds 11% in equities on average, which is incredibly low when Japanese government bonds yield nothing,’ he says.
‘It’s a much slower trend, but in the coming years Japan will provide fertile ground for genuine stockpickers.’
Emerging markets are a more challenging area for JH&P, but with a global analyst team now numbering north of 20, they are increasingly on the radar. Albeit with caveats.
‘Historically, we’ve been focused on the US, Europe, Asia and Japan and we’ve been cautious about investing in emerging markets. It can be difficult to find global leading companies and you need to be careful about losing a lot of money in currency movements,’ he says.
‘There have been at least three times in my career when the Brazilian real has fallen 50% or more. Even if you’re a good stockpicker, it is hard to protect against that.
‘India will be a developed market in 10 years and a market we are keeping an eye on and will need to take very seriously.’