Partner Insight: The 'five forces' needed to build a differentiated global fund

clock • 5 min read
Partner Insight: The 'five forces' needed to build a differentiated global fund

David Dudding, manager of the Threadneedle Global Focus Fund, explains how his team seeks out companies with a durable competitive advantage

When selecting stocks for the Threadneedle Global Focus Fund, Columbia Threadneedle's global equities team look at each company's ‘economic moats', a framework that evaluates the sources of competitive advantage, whether it be intangible assets; network effects; scale; switching costs; and/or cost advantage.

They combine this with Michael Porter's classic Five Forces - factors ranging from the threat of new entrants to the power of suppliers/customers - to evaluate the durability of a company's competitive advantage, helping them to identify those companies that can maintain strong fundamentals and that can compound growth over the medium to long term.

David Dudding, manager of the Threadneedle Global Focus Fund, explains that the network effect is in his view the best competitive advantage, which leads the team to invest heavily in internet and software companies.

This two-pronged framework for assessing competitive advantage means the fund can be much more diversified than a traditional quality vehicle, as the team is able to look for returns in areas that quality funds would naturally discount.

Dudding says: "As a straightforward quality fund, you'd be less likely to own a bank, because they are very leveraged, or biotech, for example, because they don't make any money. So it precludes quite a lot. Rather than being pure quality investors, we would say we spend more of our time looking at stocks with a competitive advantage."

The key, however, is that the company must be improving, whether that be in terms of traditional quality metrics, or on the ESG front.

The global nature of the fund allows Dudding and his team to create a more diversified product, despite the vehicle being relatively concentrated with typically between 30 and 50 holdings. Dudding describes this as a "one-stop-shop" for investors who don't wish to pick best of breed regional or sector funds.

Underpinning this is the expertise of Columbia Threadneedle's wider analyst team, which feeds into the idea generating process for the vehicle. This is particularly helpful, since some industries require more local knowledge than others, one example being banks. This is a key area where the fund differentiates itself from quality peers, particularly within emerging market financials, which can demonstrate a strong competitive advantage in their respective markets.

Dudding adds that "different parts of the world are better at different things". For example, he prefers luxury goods and consumer staples in Europe, while he thinks the best IT opportunities are to be found in the US.

To find out more about how the team hunt out firm's with the strongest competitive advantage, click here.

 

This article was funded by Columbia Threadneedle Investments.

Key Risks

Investment Risk - The value of investments can fall as well as rise and investors might not get back the sum originally invested.

Currency Risk - Where investments are in assets that are denominated in multiple currencies, or currencies other than your own, changes in exchange rates may affect the value of the investments.

Effect of Portfolio Concentration -The Fund has a concentrated portfolio (holds a limited number of investments and/or has a restricted investment universe) and if one or more of these investments declines or is otherwise affected, it may have a pronounced effect on the fund's value.

Derivatives for EPM / Hedging - The investment policy of the fund allows it to invest in derivatives for the purposes of reducing risk or minimising the cost of transactions.

Volatility Risk - The fund may exhibit significant price volatility.

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk.

Threadneedle Specialist Investment Funds ICVC ("TSIF") is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UK UCITS scheme.

This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services.

Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors' section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English only and may be obtained free of charge on request from Columbia Threadneedle Investments at PO Box 10033, Chelmsford, Essex CM99 2AL and from www.columbiathreadneedle.com

Please note that the outperformance target may not be attained. Please refer to the Fund Objective in the appendix for further information regarding the Funds benchmark.

The mention of any specific shares or bonds should not be taken as a recommendation to deal.

The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, Cannon Place, 78 Cannon Street London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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