Why Diageo? People won't stop drinking Johnnie Walker in a hurry say fund managers

Citywire AAA rated Roger Morley and Ben Kottler, managers of MFS Meridian’s Global Equity Fund, reveal why they stick to steady, 'boring' stocks like drinks giant Diageo and why they’re avoiding energy stocks even though they look cheap. 

Morley and Kotter, alongside colleagues Citywire AA rated David Mannheim, Michael Cantara and Sanjay Natarajan run the MFS Meridian Global Equity fund using a 'growth at a reasonable price' (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 currently prefers companies in 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, it is not so keen on 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 top line will struggle - it’s hard to see any growth,’ said Morley.