The idea of splitting international assets up into a series of regional portfolios is certainly out of fashion. After all, the headquarters of a company often has little relevance to its sales footprint. Nestlé, for example, gathers far more revenue from emerging markets than from its home market in Switzerland.
Theoretically, it is possible to diversify a portfolio with eight or nine shares, but I certainly wouldn’t be comfortable with the specific risk inherent in such a portfolio. Imagine if one of those shares was JSE bomb Steinhoff, for example.
Yet I also don’t see the point in investing in the Dimensional Fund Advisors global portfolio with 8,000 shares, more than in most index funds. Old Mutual Global Equity has been a successful fund with about 200 shares, and Nedgroup Global Equity is also a good choice with 25 shares.
There is always some comfort when it seems to be following other funds, and like many global funds Nedgroup Global’s top share is Alphabet, in which the core brand is Google. It makes up 7.9% of the Nedgroup fund, but who can doubt its quality? It has, along with Facebook, a dominant share of the advertising market and is a reliable cash generator. How many people still use rival search engines such as Microsoft’s Bing?
The fund, run by London-based Veritas, also owns big holdings in Microsoft (4.5% of fund) Amazon (4%) and Facebook (3,8%), but these holdings hardly differentiate it from the pack. Veritas has a team of 10 analysts and it only offers concentrated global equity portfolios.
What is interesting is that it holds the legacy cable business Charter Communications (5.7% of fund) in preference to Netflix. Andrew Headley, who controls global investments at Veritas, says that quite by chance cable, which was introduced in most US households in the 1970s and 1980s, provides such strong signals that it is hard to compete with its internet speeds. It certainly has a head start on the telecoms companies. And Headley says Netflix cannot provide the same dependable 15% annualised return as these dull cable businesses.
An even duller holding, but with even more dependable returns, is Unilever, now 4.1% of the fund. It might give only 4%-6% annual growth, but when megacap shares such as Tesla are at ludicrous multiples the tortoise can often beat the hare. “I would love to own more glamorous names such as Estee Lauder, L’Oreal, Adobe and Intuit,” says Headley, “but we have a responsibility to our clients not to overpay”.
The US health-care market is a favourite sector for global fund managers as there is pressure to cut costs, and businesses that prove they can cut costs such as vertically integrated health maintenance organisations (HMOs) should do well.
One holding in the fund, CVS Health Corporation, has a purchasing benefit manager (PBM), which negotiates substantial discounts on medicines. Headley says that without these PBMs there would be a serious threat to the distribution of drugs from Amazon. CVS also offers basic services otherwise offered by GPs through its huge 10,000 strong retail pharmacy network.
Veritas also owns CVS’s main rival, UnitedHealth, which is a more traditional health insurer and HMO business but nonetheless could also play an equally important role in cutting US health-care costs.
Canadian Pacific Railway is a fairly unusual pick for Veritas, though it is also held by Coronation Global Equity Select. As well as its dominant position hauling bulk goods across North America, the railway operator is acquiring Kansas City Southern, a far less efficient railway that will stretch the Canadian Pacific footprint as far as Mexico. Don’t forget, Canadian Pacific is a freight business and is not involved in passenger rail, a sector that has been marginal in North America for decades.
Another unusual choice is BAE Systems, which makes military aircraft and parts such as fuselages and wings. BAE Systems dodged a bullet when the proposed arms boycott of Saudi Arabia (one of its key markets) did not come about. Headley says the fund also has a smaller holding in Safran (not a spice importer), which is well placed to benefit from the revival of the commercial aviation market as it makes engines for virtually all Boeing 737s and about two thirds of Airbus 320s, the main short haul workhorses.
The fund holds no banks, not even the blue chips. Headley says because JPMorgan is not prepared to reveal its derivative exposures he does not know how much risk he is subjecting his clients to, so he would rather avoid the share. The same would apply to Goldman Sachs.
And how much added value can anyone add to commercial banking, he asks, since it involves the simple process of borrowing at one rate and lending at another?
• Cranston is a Financial Mail associate editor.
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