By applying a consistent philosophy and process, reinforced by a consistent team, the BNY Mellon Global Leaders Fund seeks to exploit the long-term attraction of equities and deliver superior risk-adjusted returns through a concentrated portfolio of large cap stocks in high quality globally leading companies.
7th December, 2016
Why invest in this Fund?
1. Long-term global focus: Walter Scott’s distinctive investment process is ideally suited to managing global equity portfolios. The firm has a clear and consistent investment philosophy and proven research process.
2. Concentrated portfolio of globally leading companies: Investment through fundamental analysis and selection of 25-30 industry leading companies with excellent long term growth potential operating with superior business models underpinned by a sustainable competitive advantage.
3. Buy and hold high conviction: A traditional, long-only ‘buy and hold’ approach to global equity management with low portfolio turnover and longevity of investment horizon.
ADP: One beneficiary of increased outsourcing and automation across the globe is US-headquartered Automatic Data Processing (ADP), which is the world’s largest processor of payrolls for businesses. On a variety of measures it has demonstrated its ability to leverage its strong suite of products and enhance returns. Return on trading assets has remained strong, and increased over time, and cash generation has also been sustainably healthy. Rising asset productivity has underpinned this improving return structure for three particular reasons. Firstly, economies of scale. The business has reaped the benefits of its investment in information technology and its thorough understanding of the myriad of regulations allows the company to provide high quality HR services, with the cost spread across its 600,000 customers. Secondly, the company enjoys long-lasting customer relationships, with the average client tenure over 10 years. This high retention rate, and with 90% of revenues recurring, in turn brings stable cash flow generation. Finally, ADP benefits from strong pricing power. It has consistently been able to pass on annual single-digit price increases, further driving asset productivity. Continued investment in its product offering and expansion of its client base, augurs well for a sustainably high return structure well into the future.
L’Oréal: There are diverse ways to invest for growth, and for many companies, mergers and acquisitions can augment an existing business and enhance returns. That said, the phrase ‘serial acquirer’ can conjure up unhappy connotations of excess debt, hopelessly inflated goodwill, or buying assets or businesses at the wrong time and the wrong price. However, there are a number of leading companies which have established a strong track-record of adding value over the years through accretive acquisitions. For the Research team at Walter Scott, L’Oréal is a prime example. The company has been a regular acquirer of businesses to complement core portfolio holdings. It has the strongest and most diversified range of brands of any player in the beauty industry, and its multi-product, multi-market presence has helped drive the group’s long-term performance. Organic growth is of course a factor in the company’s expansion. Its Luxe business, which is 33% of total sales, grew at a double-digit rate – year-on-year and a like-for-like basis – in the first half of 2018, while the still-underdeveloped Asia Pacific region posted a 22% revenue gain on the same basis. However, acquisitions of iconic brands such as Kiehl’s and Yves St. Laurent as well as more recent purchases such as Nando, a Korean life-style make up company, have formed a key element in L’Oreal’s quest for growth. It is a strategy that has been pursued from a position of robust cash flow generation and balance sheet strength, which in itself speaks of the strong operational performance of the company. It is also one which has worked. L’Oréal’s ability to acquire, incorporate and drive efficiency has been evident in margin expansion at both the gross and operating level. Return on trading assets and cash flows generated by the capital employed in the business have ratcheted higher over the years reflecting the benefits of both operating leverage and pricing power.
The research team at Walter Scott focuses on businesses that can display rigour and discipline in the manner in which they deploy capital throughout the business cycle. The cornerstone of our investment process is the pursuit of companies that can add value and act as responsible stewards of shareholder’s funds. We eschew bloated surfers of the cycle with unsustainable business models that have gorged themselves on debt and spent recklessly.
Each dollar spent should enhance value, not dilute returns
It is of course the case that to maintain market leadership, innovate, and thrive across cycles, businesses have to invest and do so in a disciplined fashion. We have no interest in companies that underinvest in their business in order to meet short-term targets. They are typically poor candidates for compounding profits. Far better that they invest appropriately to bolster and grow the company’s brands and franchise value, with the goal of achieving good returns over the long term. At the other end of the scale, those that have embarked on an undisciplined capex binge and miscalculated end demand, may find their returns on investment are diminished when the economic cycle turns. When we look at how businesses develop and expand, we have to be assured they are spending productively, and that each dollar spent is not return dilutive but value enhancing.
There are a number of metrics we employ to examine how smartly a company is spending. All of them hinge on a key tenet – the return on invested capital has to handsomely exceed the cost of capital throughout cycles. To this end, we assess and analyse capital and operational expenditure, how companies control costs, the use of M&A, intellectual property purchases; making qualitative and quantitative assessments of their impact on bottom lines and cash flows. Over the long run, a company’s ability to add value to every dollar spent will become apparent in the numbers.
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.