By applying a consistent philosophy and process, reinforced by a consistent team, the BNY Mellon Long Term Global Equity Fund seeks to exploit the long-term attraction of equities and deliver superior risk-adjusted returns.
4th April, 2008
Why invest in this Fund?
1. Aims to maintain and enhance long-term real value: Walter Scott’s distinctive investment process is ideally suited to managing global equity portfolios; from a global investment universe, the firm’s team of investment professionals has a long track record of identifying and holding shares in world-class companies, with the aim of allowing them to realise their growth potential and compound returns over the long term.
2. Flexibility to pursue the best investment ideas: Unconstrained by benchmark considerations, the investment team has the freedom to pursue attractive equity opportunities anywhere in the world.
3. Low level of downside participation rewards patient investors: The Fund aims to give investors access to a distinctive return profile over the long-term (10 years); while the Fund will not typically capture all of the ‘upside’ in a sharply rising market, the Fund is likely to demonstrate resilience in difficult conditions.
SMC Corporation: It is perhaps rather ungenerous to say that ‘high return structures’ is a phrase not always associated with Japan. The lost decades of the ‘90’s and ‘00’s gave rise to the feeling that the concept of return was one which did not necessarily feature in the corporate lexicon. This would certainly be unfair with regard to SMC Corporation, which is the market leader in pneumatic equipment used in factory automation machinery. The company is benefiting from the secular adoption of automation across multiple industries due to increasing labour costs, an aging labour force and growing demand for higher quality products. SMC has an excellent track record of improving returns. Return on trading assets rose from 32% in 2008 to 43% in 2018. The improvement in the cash generated by the capital employed in the business has been equally robust over that timeframe. These trends have been underpinned by rising employee productivity. The company has invested in a vertically integrated global production system, and all manufacturing operations are automated, employing the latest equipment of which its own pneumatic products are components. The automator has become the automated. SMC is able to offer customers low cost, high quality products with faster delivery and short lead times. The one niggle for the Research team at Walter Scott is the low return on equity. It is not an uncommon ‘problem’ in Japan. SMC’s balance sheet is overcapitalised in that the company has over US$6.5 billion in net cash which is equivalent to over 60% of shareholder’s funds. Our engagement with management on measures to improve capital return policies is longstanding, and will continue.
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 that 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 that 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) 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 or the BNY Mellon funds.