Know the companies you invest in better than any analyst in the market
This piece of advice from Zehrid Osmani, portfolio manager of the global unconstrained strategy at Franklin Templeton boutique, Martin Currie, couldn’t have been more pertinent than in 2020. Osmani, who joined from BlackRock in 2020, suggests this is one of the most important traits of success in the investment management industry, but particularly in the unconstrained, high-conviction equity approach he runs.
It is often forgotten, when we are wrapped up in ‘factors’ like momentum, that the investment industry is actually about providing capital to companies, rather than just trading their stocks. It has been an incredible year for the investment world, so what better timing than to review the year that was and understand the changes that the team at Martin Currie is making to position its portfolios for the future.
The most important lesson of 2020 was the importance of liquidity and strong balance sheets. Fundamental analysis and the ability to understand the supply chain of a business, according to Osmani, were keys to assessing the risks a company is exposed to. On the outlook for 2021, he is seemingly positive, highlighting that the “lack of yield” in fixed-income markets should continue to drive investors to equity markets, with low interest rates and a lack of inflationary pressure offering a solid backdrop for returns.
Osmani highlights “aggressive accounting practices” as the biggest red flag when his team is assessing a company. He highlights that Martin Currie carries a “detailed accounting assessment on each company” in which it considers investing, reflecting the size and scope of the ‘boutique’ manager. In its view, it is this focus on accounting that assists in protecting clients’ assets, particularly considering several high-profile accounting irregularities in recent years.
The global team has a laundry list of requirements for its “perfect” portfolio company, with a focus on strong governance, along with having high barriers to entry, strong pricing power, low disruption risk, and a solid balance sheet. Looking closely at the portfolio, this is reflected in the inclusion of names like Taiwan Semiconductors, Mastercard, Alibaba, and Adobe. Importantly, these stocks also show an “attractive valuation” based on their long-term framework.
The unconstrained strategy remained active as 2020 came to a close and vaccine approvals were released, adding a number of stocks including Veeva Systems, Kingspan and topping-up an investment in Illumina.
These companies stand out for their significant industry diversification, with Veeva building tailored software for drug commercialisation, Kingspan being a leader in insulation products, and Illumina a global leader in genome sequencing. Kingspan stands out as a major beneficiary of the so-called Democratic “Blue Wave,” with the US likely to follow Europe in incentivising the upgrade of commercial property assets for better energy efficiency.
As we enter 2021 the strategy does not hold any of the FAANGs, as according or Osmani the firm “sees better opportunities in other areas of tech.” It is, however, still overweight to technology in general, along with healthcare and consumer discretionary businesses. On the negative side, he suggests that the banking and energy sectors will “struggle to cover their cost of capital” in the years to come, resulting in an underweight position in the portfolio.
There is a decidedly green and sustainability-oriented focus for the portfolio, with “green infrastructure initiatives” seen as a “long-term structural growth opportunity” in the form of efficient buildings, electric transportation or renewable energy. On the most under-appreciated sector, it is luxury spending, supported by “emerging markets middle-class growth,” which he expects to remain a structural rather than cyclical trend, particularly as lockdowns ease.