Iain Fulton, Nikko Asset Management
Edinburgh-based Fulton is also portfolio manager for the Nikko AM Shenton Global Opportunities Fund, which was comprised of 40 global equity holdings at the end of August.
Among the top holdings, the portfolio has a major overweight position in Microsoft (5.66% versus 1.76% in benchmark) and Sony, which are commonly known as consumer electronics producers.
But Fulton told FSA during his recent trip to Asia that the two holdings, which have shifted part of their business focus to cloud technology, are misinterpreted and under-appreciated by the market.
Fulton sees improvements in return-on-investment and cost profile in Microsoft. Now, the Nasdaq-listed company manages to put capital into projects that contribute to sustainable earnings. One project is to focus more on developing cloud infrastructure and service, which “adds longevity” to the business, according to Fulton.
“[Microsoft’s] cash flow is always high. In the past, the company struggled to re-invest in projects that enhance returns.”
Fulton said the market priced in cloud services at a sensible valuation. “Because of the perception that Microsoft is an old tech company, we do not have to pay as high a valuation as you do to some other pure-play businesses within the same industry.”
Additionally, he observed an increasing operational efficiency as a result of the cost-saving programmes implemented by Microsoft’s relatively new management team.
Sony, to which the portfolio allocates a 3% overweight position against the benchmark, has a similar story.
Currently, the Tokyo-based electronics manufacturer has a slightly lower cash flow and return-on-investment than the market average. But Fulton said the company’s ongoing changes are supported by its market leading position and historical assets.
“For many years, the music production industry was in decline,” he said. “But with the growth of cloud-based streaming services, the royalty income based on the play rate on such platforms increases.”
Therefore, on cloud platforms, Sony is able to monetize the existing intellectual property of music record labels.
In addition, Sony’s top management decided to avoid re-investing aggressively in the lower-return traditional media business. Instead, the company aims to channel capital into higher growth areas.
“This is how we see [the company] from a future quality perspective,” Fulton added.
In terms of risk, cloud infrastructure is in an early stage which may lead to rapid development. He is keeping watch on the level of adoption versus capacity.
Overcapacity would likely drag down returns of the industry as a whole.
Fulton’s Shenton Global Opportunities Fund, is highly concentrated with 40 global equity holdings. The portfolio is invested in companies with sustainable return-on-investment, cash flow growth and healthy debt-to-capital ratio, according to Fulton.
The market capitalization of each holding is above $1bn and the stocks must have at least $10m of daily turnover to ensure portfolio liquidity. The investible universe is 5,000 stocks globally and the team then runs screening based on cash flow and return-on-investment, concentration of the industry and the competitiveness of the industry to narrow choices down to 40 companies.
He believes the approach leads to investments in less capital-intensive industries such as healthcare services and technology sector services such as cloud computing.
Nikko AM Shenton Global Opportunities Fund versus sector and benchmark