Given the COVID-19 pandemic, Portfolio Manager Gordon Mackay provides an update on the Global Equity Strategy, which seeks to invest in a portfolio of high quality, growing companies that have the resilience to weather unforeseen events.
A key element of the Edinburgh-based Global Equity team’s approach is to look for high-quality and predictable businesses that are capable of ‘weathering a storm’. Businesses are sought that are likely to have operational resilience during a downturn, alongside companies that do not rely on excessive levels of debt to operate.
The strategy has no exposure to the energy sector; companies in this sector tend to be highly correlated to underlying oil or gas commodity prices, which can be difficult to predict.
Similarly, the strategy does not own any developed market banks given the tough operating environment with low interest rates and the tendency for high levels of financial leverage.
A key part of our approach is to focus and look for high-quality businesses that can 'weather a storm' during an economic downturn. Now we don't make any attempt to predict when the next economic downturn will be. But we do look out for companies that have both operational resilience, in terms of the underlying business, and also companies that rely very little on debt and financial leverage.
Now, as well as only focusing on high quality and resilient businesses, what has also been important during this time period have been the conscious decisions to avoid certain parts of the market. For example, the Global Equity Strategy holds zero exposure to the energy sector because that sector is really very much driven by oil and gas prices, commodity prices, which we do not believe are predictable. Similarly, the strategy holds no [developed market] banks. [In our opinion] banks are inherently highly leveraged businesses and that doesn't fit with our approach.
Now we do hold some companies that have been in what you could say have been in the eye of the storm. Companies such as Booking Holdings, an online travel agent, which we have held since the inception of the strategy in 2010. And also companies such as IHG - InterContinental Hotels. Now because these businesses are focused on the travel sector they have been under significant pressure recently [due to travel restrictions in light of COVID-19]. Now management of both Booking Holdings and IHG have been working very hard to ensure that their balance sheets remain resilient and flexible as we have progressed through this time period.
The strategy does own a number of businesses that have not been affected at all by the coronavirus. Names such as Microsoft and Novo Nordisk, the market share leader in the diabetes treatment area. Similarly, we have names which have actually benefited from increased stay-at-home activity - companies such as Netflix.
We don't know when this coronavirus situation will end but end it will. It's impossible to know just how and if consumer behaviour changes in a post COVID-19 world. But what will not change is our approach and that is to continue to look for predictable, high quality companies with favourable long-term prospects for growth and where success is not predicated on societal harm. That has been the approach we have taken since the inception of the strategy in 2010.
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