Best In ClassAug 11 2020

Best in Class: Morgan Stanley Global Brands

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“The pandemic remains a risk. We've never seen a vaccine being discovered and manufactured in four years, let alone two, and so we think it's far more likely that society will have to live with the virus, whether it's through social distancing or testing programmes.

"And that makes the outlook far more uncertain and volatile than we believe the market is assuming.”

That’s the view of Laura Bottega, the lead product specialist on this week’s Best in Class, the Morgan Stanley Global Brands fund, who spoke to us mid-June.

We think it's far more likely that society will have to live with the virus, whether it's through social distancing or testing programmes Laura Bottega, Morgan Stanley

The team behind the fund has a simple mantra: ‘don’t lose money’ and they do this by investing in quality companies with defendable and visible future earnings, allowing them to give attractive returns to shareholders and reinvest.

It is a strategy that has proved successful in the long-term but has particularly come to light in 2020 following the unprecedented market sell-off.

While many of its peers were reeling, this fund was back in the black as early as April and is now up 8.5 per cent year to date.

Ms Bottega says 2020 started with high expectations, which worried the team, citing the fact that earnings were at their highest level since 2005.

She says: “High expectations are dangerous as they can easily disappoint. Global Brands was defensively positioned from our bottom up stock picking, with over 85 per cent of the portfolio in our three high quality sectors: staples, healthcare and IT, and we thought this defensiveness would be needed and we were right.”

The fund itself is run by a ten-strong team, headed up by William Lock.

Mr Lock heads up the London-based international equity team and joined Morgan Stanley in 1994. Prior to joining the firm, he worked at Credit Suisse First Boston's Corporate Finance Group.

The fund is a very concentrated portfolio of high-quality global companies.

The criteria the team looks for to define a quality company are features such as intangibles assets – for example permits that can provide an advantage over competitors.

They will also look for companies benefiting from economies of scale and leading market distribution. Also, every stock will have to yield at least 1 per cent in order to show commitment to minority shareholders.

“We think the discipline of having to pay a regular dividend is important to management, and it matters for the total return to shareholders over the long term.

"Secondly, we prefer dividends as it doesn't involve taking a view on the company share price,” Laura says.

From their initial list, the managers will analyse whether the returns generated historically are sustainable going forward. They will need to see that the quality characteristics of the firm can be defended, and that the firm is in control of its own destiny.

They will therefore analyse the threat of new entrants, and environmental and social factors.

The third step will be to confirm the investment story with company management teams. This is essential before an investment, as the team believes that the first thing that damages a business is the people

Once they have found investable companies, they will then assign each a valuation.

The resulting portfolio typically holds between 25-30 stocks. These will primarily be media, consumer discretionary and health care services companies. The managers deliberately avoid banks, utility, telecommunications and energy companies, as many rely on external factors.

Microsoft (9.5 per cent), Reckitt Benckiser (9 per cent) and Philip Morris (7.6 per cent) are the fund’s three largest holdings, with the top 10 accounting for almost 60 per cent of the fund.

In the past five years, the fund has returned 108.9 per cent to investors compared with 63.3 per cent for the IA Global sector average. It has an ongoing charges figure of 0.9 per cent.

Regardless of whether you believe in a V-shaped recovery or not – this fund offers investors the opportunity to be involved with some of the largest, sensibly run companies across the globe.

It also exemplifies the benefits of active management and how it can add value on the upside while retaining a strong emphasis on downside protection. The long-term performance figures really do speak for themselves.

Darius McDermott is managing director of FundCalibre