FA Magazine May 2023 - Page 26

Evan Simonoff THE LONG VIEW
Evan Simonoff THE LONG VIEW
performance reverse beginning in 2022 .
But the conventional wisdom that quality growth stocks are difficult to find outside the U . S . is a misconception .
Just ask Jeff Mueller , co-manager of the Polen Global Growth , who teaches a class in “ Compounders ” in the value investing program at Columbia University Business School . Polen is viewed as a growth shop , but Mueller takes some of his cues from Berkshire Hathaway ’ s Warren Buffett , another alumnus of that B-school .
Polen looks for investments with five specific guardrails . These criteria include companies with a 20 % return on equity , strong balance sheets ( often with more cash than debt ), stable to improving margins , abundant levels of free cash flow and strong organic growth . Only about 300 global companies meet all five requirements . Polen then strips out names it considers to be cyclical , leaving 150 stocks evenly divided between the U . S . and the rest of the world .
One of Mueller ’ s current holdings is London-headquartered Aon , a sprawling global insurance brokerage . The company is actually a beneficiary of inflation — since it can pass on any increase in prices to its clients . But its moat doesn ’ t stop there . It enjoys such a strong relationship with businesses that when insurance companies receive a claim they consider questionable on a policy sold through Aon they are likely to pay it rather than incur the giant brokerage ’ s disapproval . “ That ’ s power ,” Mueller says . Another international company Polen holds is ICON , a Dublin-based concern billing itself as the world ’ s largest clinical research organization . Many pharmaceutical and biotech companies rely on its services to outsource drug trials .
Investors looking to take advantage of growth industries often end up moving into the technology or bioscience spaces . But the concept of digitalization is broadening out to other industries as well , according to Tom Coutts , a partner at Scotland-based Baillie Gifford , which co-manages a sleeve of the giant Vanguard International Growth Fund .
Consumer behavior has become increasingly digital since the pandemic and the work-from-home boom “ brought forward ” demand for tech-related services and products , he says .
While cautioning that he ’ s not a macroeconomic forecaster , Coutts doesn ’ t believe the world will return to the low interest rates and quantitative easing that propelled growth stocks to skyhigh levels in 2021 . So companies need to be able to navigate their way through a variety of changes in the external environment in this strange post-pandemic world . Coutts doesn ’ t believe there will be a lost decade in tech stocks , though he urges investors to “ be aware of the price ” they pay for them .
As consumers engage with more digital services , Coutts expects to find more opportunity in the commercial semiconductor business . One of his favorite stocks is the Netherlands-based ASML , which will allow “ the miniaturization of semiconductors to continue .”
Not surprisingly , Coutts and Mueller favor companies with pricing power that need to capitalize on technology and social media .
Both Coutts and Mueller like a select swath of consumer stocks . Not surprisingly , they favor companies with pricing power that need to capitalize on technology and social media .
The beauty business is a prime example . Both managers cite Paris-based L ’ Oréal as a winner . Mueller also likes Estée Lauder . Though the company , which is popular in China , was hamstrung early in the pandemic by its reliance on a single distribution center in Shanghai , it now has four distribution centers across the nation .
Many of Mueller ’ s and Coutts ’ s favorite consumer stocks target the world ’ s growing affluent population . Mueller likes LVMH ’ s fashion and leather goods business , saying it should be able to gen- erate double-digit sales gains for the next five years .
Coutts likes Gucci and Ferrari . In South America , he also sees a lot of running room for Mercado Libre ( the “ Amazon of Argentina ,”) which benefits from being in a region whose retail infrastructure is much less extensive than those in the developed world . As an Argentinian company , Mercado Libre also has more experience dealing with inflation than most retailers in other nations .
One industry where the two managers disagree is the payment processing business , however . Coutts likes Adyen , a young Dutch company bearing some similarities to Stripe . He says he wouldn ’ t be surprised if Adyen was a serious rival to Visa and Mastercard in 2033 in the so-called “ war on cash .”
Mueller has looked at the Dutch company , though , and says only that he wishes them lots of luck challenging the Visa-Mastercard duopoly . That duo has “ seen their moat attacked by a host of dominant players ,” he says . Yet behemoths like Apple Pay , crypto currencies and buy-now-pay-later services like Affirm haven ’ t dented their businesses .
With personal consumption expenditures growing 4 % or 5 % annually ( and plastic each year capturing 4 % to 5 % of the payments from cash ), credit card executives enjoy almost a double-digit growth rate “ before they get out of bed ,” Mueller says . Furthermore , Visa and Mastercard “ are completing transactions in microseconds ” and providing their business clients with data analytics . Their services business also sells fraud detection and cybersecurity systems that are increasingly valuable .
It ’ s understandable that advisors looking to protect portfolio drawdowns and generate income would look to foreign markets — heavy with banks , energy and industrial businesses — to produce conservative outcomes for clients . Coutts himself says U . S . investors in foreign value stocks should be fine if their time horizon isn ’ t that long .
But that doesn ’ t mean one can ’ t find growth abroad .