In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with the award-winning fund manager Richard Pease from Henderson Global Investors. Pease manages the Gold-rated Henderson European Growth fund, the Silver-rated Henderson European Special Situations fund and the Gold-rated Henderson Horizon European Growth fund.
Video Transcript:
Alanna Petroff: For this episode of "Fund Managers' Favourites", I'm joined by the insightful and passionate Richard Pease from Henderson Global Investors. Richard, in September of 2012, actually won the Outstanding Investor Honor from Morningstar OBSR, and he is well-known in the industry for delivering some impressive returns in his funds.
So he joins me now to talk about, of course, his top picks and also his investment philosophy. So, Richard, thanks very much for coming in.
Richard Pease: My pleasure.
Petroff: Now, let's talk about your investment style. You're not just a guy that's going to say ‘I focus on value’ or ‘I focus on growth’. It's a little bit more nuanced than that. So let's talk about that a bit.
Pease: I think you want to start off trying to focus on the business and understand what its merits are. You should have a capital-light, high-return kind of business, which is actually very enduring and predictable. That's one of the things we are trying to focus on. We try to avoid certain areas, which are political, regulated and capital-heavy and that kind of thing.
We also like very global businesses, because it spreads the risk. Certainly if Europe has problems, it's much less of a problem.
The second thing I would say, if you look at the management, we try and focus on management who have skin in the game.
Petroff: So a lot of money invested?
Pease: Precisely, because I think it's important that they get rich with us, but if they screw it up, they should lose as well. That's important.
Then if you look at the actual financials, we don't like too much balance sheet leverage. It just means that you are vulnerable at the wrong times kind of thing. And Sod's Law being Sod's Law, it can happen. We focus on free cash generation. If you go through the sort of things we were talking about before, that does tend to mean lots of free cash flow and strong balance sheets. You shouldn't pay too much for that. So that's the sort of thing we are looking for. We like people who we can actually follow for longer periods, too, who've actually delivered good results.
Petroff: Now, let's go over your top three picks for right now. We have TGS (TGS), which I know you just recently bought into. We also have Zodiac Aerospace (ZC)and Kerry Group (KRZ), which is a long-term holding of yours.
Let's start with TGS. They operate in the oil and gas space, but I'm sure many people haven't heard of them before. They are not an oil and gas major, I suppose. They supply information to the oil and gas majors. So tell me about how they operate and why you like them?
Pease: They are a Norwegian company run by an American from Houston. We like them because they are very capital light. They basically buy in all the boat services in terms of seismic and they then sell the information to the oil majors. They can actually help the oil majors work out where the oil is.
Certainly their longer term track record has been very good. It's on a much more modest rating than some of the competition, which is US-quoted. So that kind of thing appeals to us. They are very generous with shareholders in terms of dividend. They put the dividend up again quite nicely
Petroff: So essentially what they do is that they rent boats, they go out and do seismic research that they sell on to the oil majors.
Pease: That's right. They actually have very good software, which helps them work out where the oil is, whether it's in obviously Africa or G-d knows where, but that's what they do.
Petroff: Okay. Now let's move on to Zodiac; they obviously work in the aerospace business. But it would be also fine if our viewers haven't heard of this one before. I hadn't heard of this prior to speaking with you now. So tell me a little bit about Zodiac and what they do?
Pease: Well, Zodiac – I mean if you fly, which I’m sure you do, you will have sat on a Zodiac seat, you will have eaten food from a Zodiac kitchen, you will have been on the Zodiac loo, probably. Let's hope you haven’t been on the Zodiac escape chutes, because they also do that and various other safety kits. And they've had a very good long-term track record. Again, the family’s strict management [mean they] have a reasonable amount of stock and we like this longevity and the structural growth story. It's not an expensive story either in terms of valuation.
Petroff: Your last top pick is Kerry Group; they operate in the food industry. Tell me a bit more about them.
Pease: Well, they started life in County Kerry in Ireland, processing farmers' milk. They've graduated now to being a very global player. They've got very little in Ireland: 5% or 6% of their profits. And they do sauces and they do ingredients for baby milk and all sorts of things. They're very big in the US and they're growing very nicely in emerging markets as well, particularly in Asia.
They've been actually big beneficiaries -- it sounds terrible to mention things like the Chinese scandal with baby milk being contaminated -- because these guys have got a great reputation and people obviously like that.
Petroff: So when there was that scandal with contaminated baby milk….
Pease: Exactly.
Petroff: …people started going to Kerry?
Pease: Exactly. That sort of thing. And I think the other thing we love about it is just the great long-term track record they're showing. I think [they’ve had] 14.5% plus earnings growth for 25 years, with no down years. And it's not a hugely expensive stock, it done better than Nestle, I think.
Pease: Now let's go over a key risk for each of these companies, because there is no company that doesn't have a risk or two.
Pease: Absolutely.
Petroff: So one risk per. Let's start with TGS.
Pease: If the oil price halved it wouldn't be good for them.
Petroff: Okay. That would impact their customers and…
Pease: Exactly.
Petroff: Okay, and Zodiac Aerospace?
Pease: I think, it's more delay rather than disaster there – if you have a delayed Dreamliner or something, it affects the timing of their profit flow.
Petroff: And the last one, Kerry Group, what's the key risk there?
Pease: I think it's probably growth. I mean, it’s priced to grow, but not generously, I mean it's on 14.5 times this year, sort of thing. If it didn't grow, I guess that would worry people a bit.
Petroff: So that would potentially hit the share price. People are expecting that growth….
Pease: It's not unrealistic growth expectations.
Petroff: Thanks very much for coming in today.
Pease: My pleasure.
Petroff: That was Richard Pease from Henderson Global Investors and I am Alanna Petroff. Thanks for watching Morningstar.
