Survival of the fittest

Jenkins says the global equity market is in a "secular bull phase, which started in the spring of 2009." He notes that the market is successfully overcoming the raft of concerns about the sovereign debt of some European countries, political uncertainty in the Middle East and Japan's post-earthquake woes.

The principal reason for the global market's current strength is "robust corporate profit growth." Jenkins adds a note of caution. "Like all bull markets, there will be corrections and consolidations."

Harbour Advisors, a division of Toronto-based CI Investments Inc., manages assets of $17.5 billion. Jenkins, who works closely with Harbour's chief investment officer, Gerry Coleman, has been lead portfolio manager of two global funds since their inception. They are: CI Harbour Foreign Equity Corporate Class, which was launched in December 2001, and CI Harbour Foreign Growth & Income Corporate Class, which followed a year later.

Harbour Foreign Equity (assets $582 million) has what Jenkins describes as a "low turnover and fairly concentrated portfolio" of 35 to 45 names. There are currently 38 holdings. The top 10 names in the portfolio, which at recent count represented 36% of total assets, reflect "our best ideas and the ones where we have the most conviction."

Stephen Jenkins

Jenkins and his team like companies that enjoy the benefits of high barriers to entry to their businesses. "They have a protective moat." The companies should have proven management, healthy free cash flows and strong balance sheets, and be capable of producing high returns on equity.

"They must have solid growth prospects and trade at reasonable valuations," Jenkins adds. In all, he says, there should be two tailwinds driving the stock, "a growth tailwind and a valuation tailwind."

The emphasis in Harbour Foreign Equity is on global companies domiciled in industrialized countries. Many of these companies, he says, are benefitting from their exposure to the high-growth emerging economies. "Today, we are finding it cheaper to buy exposure to emerging-market growth through well established multinational companies based in the developed world, but with strong footprints in the developing markets."

The largest holding in Harbour Foreign Equity is MasterCard Inc. MA at 5% of the fund. MasterCard has more than 25% of its business in emerging economies, says Jenkins. "There is low credit-card penetration in these countries, so the growth prospects for well recognized credit-card issuers, such as MasterCard, are excellent."

In all, about 50% of the business of this major global credit-card issuer is outside the United States, says Jenkins. He estimates that MasterCard can grow its earnings per share by 15% to 20% per annum over the next three to five years. "The company is a strong free-cash-flow generator and it has been buying back some of its stock."

MasterCard stock has had a good run recently. It now trades at roughly 16 times current earnings-per-share (EPS) estimates, and 14 times the estimates for 2012. "This is still modest relative to the company's growth prospects," says Jenkins, "and I would be happy to buy the stock at these levels."

Another top 10 holding in Harbour Foreign Equity is GlaxoSmithKline PLC. This global pharmaceutical company has its "patent-expiration cliff behind it," he says. It is well diversified, in that it produces prescription medicines, vaccines and consumer health-care products. It also has good exposure to emerging markets that is higher than most of its rivals.

GlaxoSmithKline's CEO, Andrew Witty, is "strongly focused on return on capital and shareholder value," says Jenkins. The stock trades at 10 to 11 times current EPS estimates and has a dividend yield of around 5%.

"The company will not generate the same level of earnings growth as MasterCard," says Jenkins. "Its EPS growth will be more modest," he says. But he and his colleagues "particularly like the company, as its management thinks and acts like shareholders."

An emerging-markets-based company with a widespread reach in the developed world is Taiwan Semiconductor Manufacturing Co. Ltd. TSM. "I buy the American Depository Receipt; it provides sufficient liquidity."

Taiwan Semiconductor Manufacturing, says Jenkins, "has brand-name global tech companies as customers, is at the forefront of its technology and is one of the lowest cost producers in the world."

		MasterCard Inc.	Taiwan Semiconductor Manufacturing Co. Ltd.
	May 3 close	$282.38	$13.46
	52-week high/low	$286.80-$191.00	$13.85-$9.30
	Market cap	$36.9 billion	$69.7 billion
	Total % return 1Y*	12.9%	29.8%
	Total % return 3Y*	-0.1%	9.3%
	Total % return 5Y*	NA	8.5%
	*As of May 3, 2011 All figures US$ Source: Morningstar

There are, says Jenkins, formidable barriers to entry in this business, given the costs of building a new manufacturing facility. Taiwan Semiconductors has a strong balance sheet with no debt and is disciplined in its capital allocation, he says.

Furthermore, the company has high profit margins, strong volumes and is able to generate a return on equity of close to 30%. The stock trades at 11.5 times its 2011 EPS estimates and has a dividend yield of about 4%.

With his requirement that there be two tailwinds (growth and value) in his holdings, Jenkins recently sold his stake in The Swatch Group SA, one of the world's largest watchmakers. "After a strong run-up in the stock price, it no longer represented good value."

Based in Switzerland, the company manufactures a wide range of leading global brands including the prestigious Omega brand of watches, Jenkins says. It also makes components for other Swiss watchmakers.

"The company has good growth prospects and is expanding in emerging markets, though it is highly dependent on the aspirations of consumers in China." This was a short-term headwind, Jenkins says, given the tightening under way in the Chinese economy. But, he adds: "I would re-establish a position in Swatch, if the valuation warranted it."