PARTNER INSIGHT: Bruno Paulson, who runs Morgan Stanley's Global Brands Equity Income Fund, admits to feeling "distinctly nervous" about markets but suggests there are signs of "global economic improvement."
He says: "It is easy to appear unduly negative, but we prefer to think we're investing with our eyes wide open. Global equity investment opportunities exist, but while identifying them one must also be aware of the risks, primarily valuation. It is possible to justify the current levels of markets, particularly when you compare them to very low bond yields. But there isn't much margin of safety if something does go wrong."
Paulson's fund invests in high quality companies globally and currently targets a 4% yield. The investment team start with a simple quantitative screen, looking at return on operating capital.
"We like high returns on capital, large gross margins and companies paying some dividend," says Paulson. "That's the simple screening which takes us down from a universe of about 2,000 companies to 200.
"Then we do the detailed work on why these companies are profitable. We ask: What are the intangible assets that drive these companies? Will those assets stay strong over time? In particular, we look very hard at the companies' risk and by this we mean the risk of losing money, be it through ESG factors or other risks."
The final element is the management. He explains that the management are crucial and even if you've got the best of franchises, the company will not compound if it's poorly managed.
"We have a high quality approach in mind, so we pivot towards consumer staples, services and software, and some elements of consumer discretionary such as US media. It's not about any particular theme as such, but the fundamentals of the individual company and whether it meets our very demanding framework."
Read more about the Morgan Stanley Global Brands Equity Income Fund here.