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Creating a global portfolio

Oct 09 2012 11:42

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Cape Town - A disciplined investment approach is critical for investors wanting to invest in global equities, says Pieter Fourie, head of global equities at Sanlam Private Investments (SPI).

This comprises three basic principles:

• Invest in businesses with a strong balance sheet and the ability to compound free cash flows at superior rates of return for long periods of time;

• Ensure the management team running the business acts in shareholder-friendly ways, which may include stock buy-backs and efficient allocation of capital to ensure high return on capital;

• Ensure the portfolio concentrates on your best picks. A great quality company should be sold only if the market valuation exceeds the intrinsic value.

Applying these principles will help investors avoid some of the common mistakes of global equity investing, such as:

Owning value traps

Many investors buy businesses because they are attractive on one or a few valuation measures, yet they remain underperformers for long periods of time, says Fourie.

There are many examples like Kodak, Motorola and BlackBerry maker RIM whose business models were challenged even though they all appeared cheap at some point.

Selling too early

Another common mistake is selling high-quality businesses when they appear fully valued, only for the business to keep delivering and investors to subsequently miss out on future returns.

Current examples include Colgate and Automatic Data Processing, which SPI owns.

“One could argue that they are not cheap, yet they continue to execute while steadily compounding free cash for shareholders due to leading industry positions,” says Fourie.

Over-diversification

American business magnate Warren Buffett – named one of the most influential people in the world by Time Magazine – warns against the perils of diversifying across too many businesses rather than concentrating more of the portfolio in your best picks.

For example, SPI is currently invested in McDonald's on the premise that even though short-term fundamentals look bleak (as reflected in the same-store sales growth collapse from 8% at the beginning of the year to only 4% currently), long-term growth dynamics in consumer spending continue to look attractive.

Fourie says SPI still believes this is a good business, with attractive growth prospects and a  competent management team trading at 15 times the 2013 earnings and yielding close to 3%.

The same could be said of its competitor Yum! Brands, which owns the Kentucky and Pizza Hut franchises. This business looks attractive after a pullback in the share price over the last few months following fears of a consumer slowdown in China.

Investors in these two businesses were well served over the last 10 years, enjoying double-digit returns ahead of the overall market, adds Fourie.

“If our process does let us down, it is almost always through selling out of a great business too soon, rather than as a result of the business model being misunderstood.

"(British multinational alcoholic beverages company) Diageo is one such example - we would love to buy this high-quality business back at an attractive price, given its very predictable cash flows and long-term dominant position in the hard liquor sector.”

 - Fin24

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investing  |  money
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