PARTNER INSIGHT: Bruno Paulson discusses the Morgan Stanley Global Brands Equity Income Fund, its high quality bias, and what distinguishes them from most income managers.
What key risk parameters do you identify and how are you mitigating them?
There is lots of information in the market about the science of risk for the end investor, but if you ask them what risk is about for them: it's about losing money. So our whole process is designed to minimise, within a fully-invested equity portfolio, the risk of losing money.
Hence we look for companies with high recurring revenue, because when there is an economic downturn, these companies aren't affected as much. Everyone keeps buying the same shampoo, for example, regardless of the macro environment. These are also companies with pricing power, which means that whatever happens to inflation, they can pass it on to the consumer. Unlike oil, say, where the price goes from $125 to $25 a barrel and the company has no control.
We also want to be sure we are selecting companies whose management are looking out for and mitigating risks. What we dislike is the permanent destruction of the capital, so engaging with management is central to our selection process.
Which sectors do you believe provide the most reliable source of income?
We think on a long-term basis so the best opportunities over the next three or six months are extremely unclear. In terms of reliable income, we think it is these high quality companies with strong franchises, with recurring revenues and pricing power, which have proven, over time, to be able to preserve and grow earnings, even in tough times.
As such earnings for our Global Brands portfolio actually went up during the financial crisis. And the companies we've chosen are the ones that are, we believe, best placed to carry on doing that. And, as we've said, we have tended to find these companies in Consumer Staples, the Software and IT services elements of Information Technology and, to an extent, the Consumer Discretionary sectors.
This distinguishes us from most income managers. Most income managers are invested in traditionally high yielding sectors such as telecoms or, increasingly, financials and energy. Therefore our Global Brands fund is potentially a good balancing element to include within an income portfolio of funds, given our more defensive, high-quality focus.
Read more about the Morgan Stanley Global Brands Equity Income Fund here.