Global equity roundtable: Part 3

Investment ideas in industrials, technology and consumer sectors.

Sonita Horvitch 9 December, 2016 | 6:00PM
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One of the advantages of diversifying outside Canada is the ability to gain exposure to world-class businesses such as industrial products, information technology and consumer goods and services. This week's coverage of our global equity roundtable, which was moderated by Morningstar columnist Sonita Horvitch, concludes today with the managers sharing their strategies and investment ideas in these sectors.

Our panellists:

Michael Hatcher, head of global equities and director of research at Trimark Investments, a division of Toronto-based Invesco Canada Ltd. A value manager, Hatcher's extensive responsibilities include that of lead manager of Trimark Fund and other key mandates such as Trimark Global Fundamental Equity and Trimark Global Dividend Class.

Peter Moeschter, executive vice-president and portfolio manager at Templeton Global Equity Group, Franklin Templeton Investments Corp. A value manager, Moeschter runs both EAFE (Europe, Australasia and Far East) and global portfolios for retail and institutional clients. Effective Feb. 1, he will become the lead manager of Templeton International Stock, succeeding Don Reed.

Matt Moody, vice-president, investment management and a member of the Mackenzie Ivy team at Mackenzie Investments. The team's wide range of mandates includes Mackenzie Ivy Foreign Equity and Mackenzie Ivy European Class. The Mackenzie Ivy team seeks to buy high-quality businesses and not overpay for them.

Q: Can we discuss the industrial sector, which had a weighting of 11% in the MSCI World Index at the end of October?

Michael Hatcher
Michael Hatcher

Michael Hatcher: Trimark Fund has a 20% weighting in industrials, the biggest sector weight. We added, or added to, three names in 2016. They are:  Stericycle, Inc. (SRCL), Flowserve Corp. (FLS) and  W.W. Grainger, Inc. (GWW). Our biggest industrial holding is  Honeywell International Inc. (HON), which we have held for a long time. It's a large global conglomerate that operates in the aviation and automation industries. It's a stable business. Stericycle provides medical-waste removal and information-destruction services. W.W. Grainger is a business-to-business distributor of products used to maintain, repair and operate facilities. Flowserve makes and services systems to move the flow of materials in a range of industries such as oil and gas, power generation and water.

Matt Moody: The biggest industrial holding in Mackenzie Ivy Foreign Equity is  United Parcel Service, Inc. (UPS). We bought W.W. Grainger over a year ago and we increased it over the year. It's a multinational company, but the United States is its biggest market. It's a business where scale matters, and Grainger has scale. Customer relations are also important and Grainger has a good customer base. The company generates high returns on capital.

Hatcher: Grainger is high quality. There was an opportunity to buy the stock when it came off significantly in the fourth quarter of 2015 and the first quarter of 2016. The equity market was concerned about Grainger's Latin American operations, which were not doing well, and its exposure to Alberta. The company is rationalizing its businesses in Latin America and the Alberta economy is improving.

Peter Moeschter
Peter Moeschter

Peter Moeschter: Industrials are not a big sector weight in the global portfolios that I manage. We haven't found many new ideas, and we've trimmed back some stocks. A holding is  Rockwell Collins, Inc. (COL). This aerospace company produces electronic communications, avionics and in-flight entertainment systems. Its business is split between commercial and defence customers. The stock sold off recently after Rockwell Collins announced it was acquiring B/E Aerospace Inc. (BEAV), which makes cabin interior products. It's a logical acquisition for Rockwell Collins, and we continue to hold the stock.

Q: Next up for discussion is information technology, which was 15% of the MSCI World Index at the end of October.

Hatcher: Trimark Fund has a sizeable tech weighting. Among the larger holdings is NXP Semiconductors N.V. (NXPI). It makes integrated circuits that turn analog signals into digital signals. The company has a dominant market share.  Qualcomm Inc. (QCOM) is in the throes of making a bid for NXP. Other holdings in this sector include  Microsoft Corp. (MSFT),  Oracle Corp. (ORCL) and Google parent Alphabet Inc., both the  Class A shares (GOOGL) and the  Class C shares (GOOG).

Moody: We have only a modest exposure to technology. We also own Oracle. It's a top-10 holding in Mackenzie Ivy Foreign Equity.

Hatcher: Alphabet/Google has a dominant search technology that allows the company to attract advertising. Microsoft software is integrated into the information-technology systems of many large corporations. It's moving successfully into the Cloud. Microsoft offers a hybrid solution that allows its enterprises to have both an on-premises storage solution and to use the Cloud. We think that a hybrid solution is a must. Microsoft has strong recurring revenue. Along the same theme, Oracle is dominant in the database business and its software is embedded into its customers' businesses. It's a sticky business model, with recurring revenue.

Moody: Oracle is entrenched with its customers, and its business is supported by a strong sales culture. We also own  Amphenol Corp. (APH). It makes electronic and fibre-optic connectors, cable and interconnect systems. These are used in a variety of products such as mobile phones, aircraft and cars. The company is run in an efficient way. It's able to supply a broad range of products at a low cost, which leads to good returns and good growth.

Moeschter: The global portfolios have about 15% in technology. We own Alphabet Class C shares, Microsoft and Oracle. We started buying Alphabet about a year and a half ago. The stock is not as cheap now as it was. Alphabet has a good balance sheet and, in addition to the advertising revenue, it generates money from products that are used every day including its operating system Android and Google Chrome. We've held Microsoft for years. The stock has done well and we're not adding to it, but it remains a core holding. We recently added to our holding in Oracle, as the valuation is attractive.

Q: Finally, let us discuss consumer-related stocks. Consumer staples represented 10.4% of the MSCI World Index at the end of October, while consumer-discretionary stocks had a 12.6% weighting. Matt, these two sectors are the biggest weights in Mackenzie Ivy Foreign Equity.

Matt Moody
Matt Moody

Moody: The fund has 18% in consumer-discretionary stocks and 14% in consumer staples. If you take away the cash holding and look only at the equity holdings, the fund has 26% in consumer-discretionary stocks and 20% in staples for a total of 46% of the equity holdings.

Among our consumer-discretionary holdings are  Omnicom Group Inc. (OMC) and  Nike, Inc. (NKE). Omnicom is the biggest holding in the fund. It's an advertising and communications holding company. The business has modest capital requirements and is highly cash-generative. The industry is fairly concentrated. As marketing has become more complex over time, the need for this service has increased. The valuation looks quite reasonable. Nike has a great brand, a phenomenal culture and no debt. Nike is a giant in its field and it's a field where marketing dollars go a long way. It has a sustainable moat.

Among the staples, we own  Procter & Gamble Co. (PG). It's a collection of strong brands in a lot of areas. The company lost its way somewhat, but we think that the underlying culture is still there and the steps being taken to revive the culture and fix the business are the correct ones. The company has challenges and this represented a valuation opportunity.

Moeschter: We have 3% of the global portfolios in consumer staples and around 8% in consumer-discretionary stocks. We find that you pay a lot for the stability that is offered by consumer staples. We have a range of consumer-discretionary holdings. One name that we added recently is the high-end jewellery designer and retailer  Tiffany & Co. (TIF). The company did not over-expand, in contrast to other companies, in the rush to offer luxury brands in Asia. It didn't have to retrench as much as some others, when spending in Asia slowed down. Tiffany has a good brand and still has room to expand globally. It's a small weight. The stock has risen since we bought it, so it could be a buy on weakness.

Hatcher:Trimark Fund has 7% in consumer-discretionary stocks and 15% in consumer-staples stocks. A discretionary holding in the fund that I will highlight is  Walt Disney Co. (DIS). A staples name that I would like to discuss is  Anheuser-Busch inBev SA/NV, which has an American Depository Receipt and trades on the New York Stock Exchange under the ticker BUD.

Nike, Inc. Tiffany & Co. Walt Disney Co.
Dec. 7 close $52.10 $84.35 $101.99
52-week high/low $68.20-$49.01 $84.92-$56.98 $114.75-$86.25
Market cap $86.2 billion $10.5 billion $162.7 billion
Total % return 1Y* -19.9 13.1 -9.2
Total % return 3Y* 10.6 0.3 14.1
Total % return 5Y* 17.9 7.5 23.7
*As of Dec. 7, 2016. All figures in U.S. dollars
Source: Morningstar

Disney has such strong brands and franchises including parks and resorts, studio entertainment and consumer products. The equity market is focused on the loss of cable subscribers at its sports channel ESPN. Our view is that people are viewing sports through media other than cable television, and ESPN can take advantage of this.

Anheuser-Busch has a dominant position in the U.S. beer market, which is a mature market. It's able to reallocate that capital to emerging markets. It has significant market shares in Mexico and Brazil.

Photos: Paul Lawrence Photography

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class A174.99 USD0.83Rating
Alphabet Inc Class C176.33 USD0.73Rating
Amphenol Corp Class A136.24 USD-0.12Rating
Anheuser-Busch InBev SA/NV ADR65.04 USD0.65Rating
Flowserve Corp49.51 USD1.33
Honeywell International Inc199.69 USD0.15Rating
Microsoft Corp430.16 USD0.74Rating
Nike Inc Class B91.75 USD0.38Rating
NXP Semiconductors NV277.17 USD1.63Rating
Omnicom Group Inc95.11 USD0.94Rating
Oracle Corp122.91 USD-0.95Rating
Procter & Gamble Co165.33 USD-0.10Rating
Qualcomm Inc210.36 USD4.26Rating
Stericycle Inc51.65 USD15.42Rating
The Walt Disney Co101.76 USD1.09Rating
United Parcel Service Inc Class B138.66 USD-0.32Rating
W.W. Grainger Inc966.40 USD1.23Rating

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Sonita Horvitch

Sonita Horvitch  

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