HEAD-TO-HEAD: Morgan Stanley IM versus Pictet AM

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Investment approach

The investment team behind Morgan Stanley Global Brands Fund has “a mantra: ‘don’t lose money’, which will possibly be as comforting to investors as the familiar names that can be found in the portfolio”, said McDermott.

The team looks for high quality companies with defendable and visible future earnings, allowing them to give attractive returns to shareholders and reinvest in their business to stay ahead

“The fund has a concentrated portfolio comprising high quality global companies with strong intangible assets – such as strong network benefits and brands, or licenses and permits that can provide an advantage over competitors,” he said.

The investment process starts with a screen to identify companies generating high returns on capital, derived from low leverage and low capital intensity. Every stock also has to yield at least 1% in order to show commitment to minority shareholders, according to McDermott.

From this list, the managers analyse whether the returns achieved historically are sustainable going forward.

“They need to see that the quality characteristics of the firm can be defended, and that the firm is in control of its own destiny. They therefore assess the threat of new entrants, and environmental and social factors,” said McDermott.

The third step in the process is to confirm the investment story with company management teams.

“This is essential before an investment, as the team believes that the first thing that damages a business is the people. The team also have conversations with other stakeholders and will look at the businesses strategy, not just quarterly earnings,” said McDermott.

When they have designated company as investible, the team determine its stock’s fair value.

“The resulting portfolio holds between 20 and 40 stocks, but the sweet spot will be around 25 to 30,” he said.

In practice, most selections are media, consumer discretionary and healthcare services companies, and the managers deliberately avoid banks, utility, telecommunications and energy companies, as “they tend not to be in control of their own destiny and rely on external factors,” according to McDermott.

Top h0ldings include Microsoft, Philip Morris and Visa.

Stocks are bought with a four-year outlook, so turnover is around 25%, “although positions are topped and tailed, depending on their performance and attractiveness”.

“While the fund can invest globally, typically the vast majority of its assets are in developed countries. That said, holdings may still have considerable emerging market exposure due to their global business lines,” said McDermott.

Turning to the Pictet Premium Brands Fund, McDermott said that it invests in companies that specialise in high-end products or services, and that enjoy broad recognition and respond to different human aspirations.

“These are companies which generally enjoy strong market prominence, because they have the ability to create or channel consumer trends and they may also even set the prices of their products or services,” he added.

The fund aims to capture the investment opportunities arising from long-term trends such as the shifting geographic composition of the affluent consumer base, the growth of e-commerce and the new “experiential luxury” phenomenon, such as fine food and wine, and expensive travel and hospitality.

The managers use a dedicated advisory board to help track the evolution of themes and identify future trends in consumption patterns, demographic shifts and technological innovations that could affect a company’s business model.

The process also includes examining “brand integrity” and a company’s commitment to ESG issues, according to McDermott.

Some companies are excluded, for instance manufacturers of “controversial” weapons blacklist, and companies whose activities have an adverse impact on the “premium brand’s value chain due to their negative social or environmental effects, such as cruise liners and casinos”.

Next, companies are scored according to the Pictet’s “five pillars of a premium brand”: experience, brand integrity, digital integration, operational excellence and differentiation.

The result is an investible universe of 120 to 150 companies, which are subject to fundamental analysis and onsite visits and management meetings.

“The end portfolio is quite concentrated, with just 32 holdings at present, but it is well-diversified across geographies and sectors,” said McDermott.

Top holdings include Nike, L’Oreal and Hermes.

Fund characteristics

Country allocation:

Source: Fund factsheets, 31 May 2020

Sector allocation:

Source: Morningstar, 31 May 2020

Top 5 holdings:

Source: Fund factsheets, 31 May 2020

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