These exceptional qualities create barriers to entry against competitive threats and high switching costs for customers. The resulting pricing power, together with capital-light business models and financial strength, have enabled franchise companies to sustain high levels of profitability over the long term, far beyond market expectations.
Focus on sustainability
Because we invest for the long term, we have a strong focus on the future sustainability of companies. Our active approach allows us to gain an understanding of companies’ resilience to disruptive forces and whether they have taken steps to ‘future-proof’ their businesses. So, we pick companies with enduring qualities, and consequently, we have a low portfolio turnover. Since inception, the portfolio turnover for the Global Franchise Fund is only around 50%. This helps to minimise the investment cost drag on investment returns, which can prove meaningful over the long term.
Delivering long-term sustainable returns to our investors (durable alpha) requires ongoing analysis and engagement with companies and their stakeholders. We engage regularly with management teams and evaluate companies’ impact on their various stakeholders. Our active investment approach enables us to carefully assess the environmental, social and governmental (ESG) risk and opportunities that can affect the sustainability of a company’s business model; the quality of its accounting policies; and governance issues such as capital allocation, risk management, board composition, audit, remuneration, and shareholder rights.
The Investec Global Franchise Fund has a long-term track record of delivering durable, defensive returns to investors, thanks to our differentiated, active investment approach (Figure 1 and Table 1).
Figure 1: Cumulative performance in US dollars since inception*
Table 1: Annualised returns in US dollars
|1 year||3 years p.a.||5 years p.a.||10 years p.a.||Since inception p.a.*|
|Investec Global Franchise A Acc||10.7%||10.1%||8.1%||11.0%||7.0%|
|MSCI AC World NR**||5.7%||11.6%||6.2%||10.1%||4.5%|
Past performance is not a reliable indicator of future results, losses may be made. Source: Morningstar, dates to 30.06.19, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, in US dollars. **The comparative index changed to the MSCI AC World Index from 1 October 2011. Highest and lowest returns achieved during a rolling 12-month period (since inception): Feb-10: 54.4%, and Feb-09: -38.7% – Investec Global Franchise A Acc share class. *Launch simulation date: 10.04.07. Quartile ranking within the GIFS Global Large-Cap Blend Equity.
While Quality indices are still very overweight consumer staples, we have reduced our exposure to consumer staples over last few years, in favour of interesting defensive growth opportunities. Technology, which is now our highest sector exposure, has contributed materially to our alpha generation. Furthermore, our active bottom-up stock picking has also added alpha. This means that our differentiated approach to quality stocks is not replicable by investing in the market, or even in a quality index.
Avoiding capital losses is just as important as achieving gains when it comes to generating sustainable long-term returns. So, we seek companies which have defensive characteristics. We typically like companies that have recurring revenue streams, enduring competitive advantages, strong management teams, low debt levels and healthy balance sheets. This helps to reduce our investors’ exposure to operational, business and financial risks. On top of that, we manage valuation risk by investing in quality companies at reasonable prices.
Importantly, the Investec Global Franchise Fund’s outperformance against the comparison index – the MSCI ACWI – has been achieved with lower risk, both in terms of drawdowns and volatility.
Figure 2: Outperformance with low volatility – risk vs. return in US dollars
Past performance is not a reliable indicator of future results, losses may be made. Source: Morningstar, 30.04.07 to 30.06.19. Performance for the fund is NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, in US dollars. *The comparative index changed to the MSCI AC World Index from 1 October 2011.
The portfolio has shown its mettle during severe market corrections, such as when the global financial crisis hit investors. For instance, over the period May 2007 to March 2009, the Investec Global Franchise strategy’s drawdown was 20.5% while the MSCI ACWI lost 37.7%. The quality stocks in our portfolio have also proven to be more defensive than the MSCI ACWI Quality Index during falling markets.
Figure 3: Average rolling 12-month performance in US dollars
Past performance is not a reliable indicator of future results, losses may be made. Source: Morningstar, 30.06.19. Performance for the fund is NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, in US dollars. Rolling 12-month periods. MSCI ACWI Quality index launched 18.12.12 – synthesised performance history prior to that date.
There are clear risk and return arguments that support an active approach to quality equity investing. As active investors, we have the ability to manage downside risks, while still participating in up markets. This should provide some comfort to investors in these uncertain times where global growth concerns and geopolitical uncertainty are creating a challenging investment environment.
The Investec Global Franchise Fund has a long-term track-record of delivering durable, defensive and differentiated returns. Our portfolio companies have been less sensitive to the economic and market cycle and have offered an attractive combination of resilience and long-term structural growth – much needed attributes in this uncertain environment.
1Morningstar Direct data, as at 31.12.18.
2Morningstar Fund Flows and Investment Trends, 2009.
3Active share is the fraction of the fund’s portfolio holdings that deviate from the benchmark index – Investopedia.