Rupert Della-Porta and Katherine Garrett-Cox, the managers of Aberdeen Asset Management's new Glob...
Rupert Della-Porta and Katherine Garrett-Cox, the managers of Aberdeen Asset Management's new Global Champions Fund, have faith in long-term investments. Della-Porta, head of US equities at Aberdeen, says that even if stock markets continue to dive, the themes of globalisation, innovation and communication are robust, and will continue to deliver superior investment returns.
Although some companies that meet these themes may suffer in the short term, the long-term outlook for stocks that fall within these themes is strong.
Now some £81.4m in size, Aberdeen Global Champions was launched in October 2000 to capitalise on the skills of Garrett-Cox and Della-Porta, who were previously successful US fund managers at the fund management group Hill Samuel, which has since been taken over by Scottish Widows.
Garrett-Cox was recently appointed Aberdeen's chief investment officer, which is proving beneficial in managing a fund that has the ability to draw on the expertise of more than 100 investment professionals across the Aberdeen group. Shortly after launch, the fund was given a Standard & Poor's frA rating. S&P says the fund should benefit from Aberdeen's strong commitment to the technology sector, a major focus in the fund. Aberdeen features a strong technology team and was a pioneer of investment in this sector, launching its technology unit trust in 1982.
Although Global Champions has a place on many financial advisers' recommendation lists and Della-Porta and Garrett-Cox are well known in the City for their proven investment ability, market timing hasn't been the best. Since October, fears that the US would slip into recession have heightened, and world stock markets are in free fall. This has affected global companies and since launch the fund is down 24.5%.
Nevertheless, Della-Porta says Aberdeen Global Champions offers a feasible investment approach that is poised to capitalise on the changing global marketplace where geographic boundaries now have little relevance. He says the three thematic pillars of investment globalisation, communication and innovation provide the backbone for the fund and that each one contains further specific sub-themes. Under the globalisation pillar, for example, there are six themes: power, demographics, wealth management, global gorillas, new for old, and outsourcing.
"The power theme is suggested by a number of different factors occurring around the world. The fact that there have been electricity shortages in the US and that in Europe unpopular nuclear power stations will be replaced by gas-fired power stations is creating enormous demand for leading companies." Della-Porta says.
Underspending by large oil companies for years is creating demand in the oil services industry around the world. Della-Porta adds: "There is also the ongoing development of other countries in the world. They need more electricity for their industries and cities. The expertise of US or European-based companies to help them build that generator capacity is in demand. AES and BP Amoco are two companies we like in this area."
New for old
Another theme, new for old, refers to companies that have been around for a while and reinvent themselves through adopting new technology. For instance, Japanese companies that are restructuring.
Global gorillas refers to the super titanic companies that can move their production around the world benefiting from lower production costs and cheaper sourcing. Examples of these types of companies include General Electric, Wal-Mart and NestlŽ.
The demographics theme relates to the growing, and ageing, worldwide population. The World Health Organisation estimates the number of people over 65 will rise from 390 million to 800 million by 2025, from 6.6% to 10% of the world's population. Older people also have more disposable income to spend on their lifestyle.
Della-Porta says: "They also want to stay healthy and under the innovations pillar we are focused on companies with emerging solutions for health issues."
Wealth creation is a theme within the globalisation pillar that Della-Porta describes as particularly interesting. This is because being a local player is important and it doesn't necessarily incorporate gigantic multinational companies.
"Nikko Securities in Japan, Citigroup in the US and HSBC in Europe and Asia are all pursuing quite different methods to tap into, manage and look after people's wealth," Della-Porta says.
"It's not just about managing the assets of the wealthy few," says Della-Porta. "Yes there are more of them all around the world, but it is really about helping working people provide for themselves in the post-work life which is lengthening all the time as life expectancy increases. A local face is critical for success here."
This theme capitalises on the trend whereby more and more companies are outsourcing their non-core activities.
Della-Porta says Aberdeen wants to limit its sub-themes and so some of them recur within the pillars. For example one theme of new for old is evident in both the globalisation and communication pillar, and demographics is a theme both within globalisation and innovation, through lifestyle and then healthcare stocks.
After selecting the sub theme, the managers will then look to the industries that are set to benefit from that trend.
In the new for old theme, for example, there are several industrial companies. Then, once the beneficiaries are determined (which are normal industries), the managers will then look to the stocks.
Della-Porta says although the fund is not invested taking into account a set benchmark, the managers do pay attention to the FTSE World Index for risk monitoring as well as a performance yardstick.
"We don't start with an index, but we certainly pay attention to its major component companies and countries," he says.
"When we analysed the FTSE World Index, we saw that globalisation covered fully 50% of this index. Innovation, which includes healthcare and technology, accounts for 30%, and communications represents about 10%. The remainder of the index, which is not particularly captured in any of our themes, accounts for around 10%. We see little prospects for growth in that area, which covers sectors like utilities."
Della-Porta and Garrett-Cox, within the fund, have established their own broad benchmark for the portfolio. Currently the fund is 60% invested in the globalisation theme, 25% in innovation and 7% in communication. The remaining 8% is invested in cash, but the fund intends to be fully invested most of the time.
While themes, rather than a formal benchmark, drive the portfolio, there are broad guidelines on geographical weightings. These are North America 50% to 80%, Europe 15% to 50%, and other
0% to 15%. Currently there is 58% invested in the US, 26% in Europe and 8% in other, with the remainder in cash.
"The point of having the fund run by people with a background in US markets is that technology, entrepreneurial flair, advanced capital markets and restructuring are all areas where the US has led and the rest of the world followed. This is still so despite the current slowdown in the US," Della-Porta says.
"Clearly we think technology and innovation are very strong themes and we want to invest in them for the longer term. There is however a valuation and earnings visibility problem, particularly in the US. So it is not appropriate to have a very high level of exposure to that area until we anticipate better profits growth ahead."
Della-Porta says US companies are abundant within the innovation theme. And in addition to offering world leaders in technology, there are also exciting healthcare companies to be found in the world's richest healthcare market. "Over the long term we think these will be great themes and are looking to build them back up, but in the short term we are more wary," he says.
Geographically, the most positive area is the Continent, and Della-Porta has been building up exposure there since launch.
At a thematic pillar level, the managers have been increasing exposure to the communications theme and reducing exposure to innovation by disposing of US tech holdings.
"We are more exposed to the communications theme now than when the fund was launched. This is because there has been a major correction of telecom stocks, after problems with access to capital.
"The outlook now has significantly improved for telecom stocks and access to capital has also improved, as basically corporate bond spreads have become much narrower and capital markets have opened up to them again, so now is a good time to start increasing exposure," he says.
There are currently 61 holdings in the portfolio, and the general range is expected to be 50 to 70.
The largest holding, Philip Morris, accounts for 2.7%. No stock will ever represent more than 5% of the fund. Della-Porta says that as well as being the world's largest tobacco company, Philip Morris is also an enormous food company, which is the most exciting area of its business.
"This is a low valuation stock, trading at 10 times this year's earnings. Meanwhile, its growth is accelerating from the integration of the Nabisco food company. It is also going to have a partial offering of the Kraft food business in the first half of this year. What that means is we think there is an attractive valuation story with this stock, and we see good catalysts for why that stock price should rise," he says.
Della-Porta says the fact Philip Morris is the top holding is testimony to the method used by the managers to select stocks.
"As with all teams at Aberdeen, we are looking for stocks that are undervalued. We look for growth at an attractive price, rather than growth at any price. Moreover, there has to be are identifiable catalysts for the stock price to achieve our target," Della-Porta says.
Once a stock is bought, there are price targets put in place and an automatic review is carried out once a stock meets that target. "If we meet our price target, we will review the position. That may involve taking profits, selling, or holding a stock. It's not an automatic sell, but it is an automatic review," Della-Porta says.
"If we own a stock for particular reasons and if they don't unfold, then we also have our sell case. For example, we are very much committed to the idea that AOL will benefit from cross-selling, and if that doesn't happen, then we will review the stock.
"If a stock goes down, that's an automatic review. We have a 10% to 15% automatic stock loss review. Clearly, if there are more generic or macro reasons why a stock will go down and we will take those on board. If it's more stock specific, then we react."
Future global winners
Although the fund is focused on the global champions of today, Della-Porta says he is also looking for those of tomorrow and to do this he looks beyond large-cap companies. The fund is now 51% in large caps, 36% in mid cap and 5% in small cap.
"While the top 10 stocks will tend to be well-known names with large market caps, look a lot more deeper and what we have is more nifty sized companies," he says.
BTG is an example of a mid cap in the fund. Della-Porta says he likes this due to its intellectual property rights providing attractive long-term growth prospects.
"BTG is a UK company whose business is facilitating companies and individuals with intellectual property rights and bringing those to commercial application. They often then take a licence fee once this is done, enabling them to share in the success of the property. It plays to our outsourcing theme in that it takes the initial idea of a product or process and brings it to some sort of commercial application," he says.