Nothing is certain but death and taxes. To this Benjamin Franklin might have reasonably addended ‘but people’s desire to avoid both should not be underestimated’. Putting aside the morality of the latter the desire to maximise one’s health speaks to us all. It is this desire which has helped the healthcare sector to deliver enviable multi-year returns. Globally the sector has generated a total return of 9% p.a. since 2005, outperforming the broader market by over 2% p.a. Source: Bloomberg, world = developed markets But fortunes have not been evenly distributed. Beneath the surface the drivers of growth are shifting. Since the late ‘80s cash earnings for the broad healthcare space have exhibited a rising trend against the market, illustrating the unique secular demand underpinning the sector. However, the beneficiaries of this demand have rotated. Large cap pharma, often a heuristic for the sector, continues to dominate the market cap spectrum, but better growth is to be found elsewhere. This is reflected in starkly contrasting stock performance. Despite representing some 50% of the whole, pharma gained only 46% since 2012 (a CAGR of 6%) against the sector up 112% (CAGR: 13%). Distributable Cash Earnings - US Healthcare vs S&P 500, [...]
Credit risk is the risk that companies do not repay their debts. This risk can be measured and traded. CDX IG is an index comprising the 125 most liquid single name Credit Default Swaps (CDS) in the investment grade space in the US. The most commonly traded tenor point is 5 years and the index is refreshed by the provider every 6 months to maintain maturity and liquidity profile of the underlying names. We are currently on series 31 (meaning the index has been running in one form or another since 2002-2003). The index is quoted in terms of basis points and a quote represents the annual cost of insuring a notional amount of the underlying assets (as a simple approximation). For example; with CDX IG NA currently trading at 78bps (0.78%) an investor paying to insure US$10mn for 5 years would pay US$78,000 annually. In return for this insurance premium they would be made whole (minus the recovery rate) in the event of any defaults during the period, proportionate to the size of the constituent. On the flip side, the seller of such a contract would receive US$78,000 annually whilst being on the hook for the above obligations. These [...]
Following several months of work, we have been awarded HK Connect status which allows us to invest in Shenzhen and Shanghai listed ‘A’ shares (formerly known as local stock). The ‘stock connect’ link between China’s mainland markets and Hong Kong relaxes restrictions that historically split the Chinese stock market between shares targeted at local investors and those available to international investors. The link was first launched in 2014 between Shanghai and Hong Kong. In late 2016 it was further extended to include the burgeoning, technology hub of Shenzhen. It allows mainland Chinese to purchase shares listed in Hong Kong and lets foreigners buy China A shares listed on the mainland. This vastly expands the range of possible investments we can make in the world’s most exciting economy. Fay Ren, Co-Manager of TM Cerno Pacific & Emerging comments: “The A-share market is more than twice the size of the H-share market, giving us access to a wealth of new ideas to explore. There are some real gems in the mix and we are thrilled with the opportunity to find and own them, in particular the more tech oriented entrepreneurial names that are little known outside the country”. Goldman Sachs, with whom [...]
Our aim, within the context of the Global Leaders Fund, is to own great companies over multiple market cycles. In this way we operate over a timeframe where competition is scarcer, allowing us the best opportunity to outperform global markets. This overarching objective is underpinned by three concepts: growth, long term relevance (sustainability of returns) and financial soundness. All three are crucial in delineating the leading businesses we want to own. Companies that we can employ in a concentrated, low turnover portfolio and sleep comfortably at night. Growth is perhaps the easier to define: does the company have the tools at its disposal to compound earnings at an attractive rate over time. Relevance and sustainability has sharply diverging meanings depending on who one asks. Our preference is to cast the net as broadly as possible: simply, a company whose current earnings to do not borrow from its future earnings. This concept is wide ranging and influences the fund exclusions. Tobacco for example, where new customers must be found to offset the natural elimination of the existing base by the product itself. Old energy with the extensive disruption from renewables already in full swing. Banks, where inherent leverage hangs like a [...]
Conducting big business in the decades following the industrial revolution normally entailed the marshalling of labour and resources in a profitable sinecure. Fur trappers and tin miners, agriculture and energy, railroads and steel all fit this model. These industries persist today but are becoming scarce in the pantheon of very top companies measured by market capitalisation or economic value addition. Labour has mobilised, a thicket of laws exists to prevent excessive exploitation and monopolies of international scale are prohibited. Only perhaps in the world of software and social media have we seen the kind of recently accrued market share power that breeds exploitative practices: Microsoft’s dominance of operating system software is a matter of historic fact and Facebook’s control of the network effect across its platforms are prime examples of predatory corporate behaviour: rabid until checked. Outside these large and unusual cases, successful companies conducting business across multiple continents need to balance of standardisation against customisation. Standard so often entails stand-still which is a death curse for companies. At the other end of the spectrum, few businesses can adopt a fully bespoke offering and hope to grow beyond their artisanal roots. There is another category, companies and sometimes just one-person [...]
Newly approved Global Leaders stock: Chr. Hansen is a leading global bioscience company engaged in the development of natural ingredient solutions for the food, nutritional, pharmaceutical and agricultural industries. The group’s products leverage its core competence in microbial strains, or ‘good bacteria’, enzymes and natural colours. 60% of group sales are derived from microbial cultures (the majority of which are starter cultures for cheese and fermented milk), 20% from human and animal probiotics, and 20% from natural colourings for the food and beverage industry. The group is uniquely positioned at the convergence of multiple consumer trends: the desire for natural ingredients, the removal of antibiotics and chemical preservatives in the food chain, health and wellness and the huge potential of the human microbiome. Over the past 10 years the group has delivered an admirable combination of expanding margins and organic growth of 10% p.a. Concurrently return on capital has expanded from 4% in 2010 to 16% in 2016/17 driven primarily by improved asset turnover.