Economic headwinds have battered equity markets but it is possible to find companies with "something special" that will benefit investors over the long term, a fund manager has claimed.
Bertrand Cliquet, portfolio manager of the Lazard Global Equity Franchise fund, told Investment Adviser's Eleanor Duncan he had been positioning his fund to protect against global headwinds by investing extremely selectively.
He described the companies in which the fund invests as "economic franchises", and said these particular companies tended to possess "something special about their business which would enable them to consistently exceed or meet their cost of capital".
Such companies, he said, would have "superior earnings predictability attributes" and not suffer in the short-term as a result of market noise.
The manager said there were various metrics by which he ascertained whether a company would be classed as having an "economic franchise".
Our investment process really helps us look through short-term noise and focus on long-term value of the stock. For example, they might have natural monopolies, such as Natural Grid, or there would be strong cost leadership, where the sheer size of its business provided a company with a strong competitive edge over its rivals.
Mr Cliquet cited Danish biological solutions company Novozymes - which develops enzymes that get used in household objects such as washing powder - as an example of a company with strong cost leadership.
He explained: "Its size is such compared with its next direct competitor, that for competitors to replicate the same research and development investment as Novozymes, they would have to spend half their revenues and that is unlikely."
Other sources of economic franchise include looking at company brands and intellectual property, whether this related to luxury items or everyday products such as toothpaste, and those companies with high switching costs.
This, Mr Cliquet said, meant companies who provide such a critical service to their customers that it would make it very risky for their customers to switch providers.
According to the manager, focusing on such companies would enable the team to ride out short-term volatility.
In terms of the investment process, Mr Cliquet said the team was extremely selective, with only 250 companies showing eligibility under the "economic franchise" criteria.
He commented: "Think about these as a highly exclusive club. These 250 companies are put through fundamental analysis, where members of the team debate and discuss valuations for those stocks.
"Then we have a value ranking process where we take the intrinsic value agreed by the team and compare this to the share price.
"The stocks are then ranked according to their relative appeal and we buy companies that are at the most attractive end of the value spectrum."
He said this was a great tool for investment discipline, as it "really helps us look through short-term noise and focus on long-term value of the stock.
"It is also good for sizing conviction where we find the greatest upside and for providing a good buy-sell discipline."
Technology was a "stand-out" area the team has been focusing on, he said, looking particularly at those companies such as Microsoft who are migrating more towards The Cloud.
Not only would this reduce their cost of doing business, which would enhance profitability, but they could also pass cost savings onto their customers - a "win-win situation", he said.
This was completely the opposite to the traditional, mature, less nimble sectors such as consumer staples.
Mr Cliquet said: "This sector trades on historically high multiples; as a result, the risk-return trade off to us is tilted towards the downside and so we have zero exposure to this sector."
