Last year was busier than usual for the Troy Trojan Global Equity fund. The portfolio, run by Gabrielle Boyle and George Viney, generally has turnover in the low single digits, but in 2018 this hit 10% as stock markets presented opportunities throughout the year.
One big reason for this was the takeover of UK-listed holding Sky by US rival Comcast. That returned cash to the managers that they re-deployed into the market.
But they also saw valuation levels in some companies that had been on their radars for a long time pare back to attractive levels. Below, Boyle and Viney talk us through two new positions initiated and one addition to an existing long-term holding.
Facebook (FB)
The fund initiated a small position in social media giant Facebook in the first quarter of 2018, a period during which the stock fell at one point to trade at $171, then a seven-month low.
As the year went on, though, the stock continued to weaken on high-profile negative news like the Cambridge Analytica scandal and reports of political interference in both US elections and the Brexit referendum.
The stock went on to fall to $153 in March, recover to an all-time high $214 in August and then retrace those gains back to $171 in September, before slipping to a two-year low $124 on Christmas Eve.
During all this upheaval, Boyle and Viney were slowly adding to their new position. As at October 30, the firm accounted for 2.6% of the portfolio, Morningstar Direct data show.
“It’s a really good example of being patient, waiting and accumulating shares slowly over a period of time,” Viney tells Morningstar.co.uk. “We didn’t make it a top 10 holding straight away, which some of our peers did and that turned out in retrospect to be premature.”
The team note that the kind of quality companies they like to buy tend to be richly priced most of the time in the absence of bad news. But when they become the subject of front page news almost every day, they can become reasonably priced or, in the case of Facebook, outright cheap.
Despite worries over user growth, Viney says recent fourth quarter results were “a pretty clear demonstration that users are not abandoning Facebook”. More to the point, advertisers are struggling to find alternative ways of reaching such a large audience with such good advertising technology.
Digital advertising is still a nascent business, Viney adds. Facebook can also tap into the growth of e-commerce through advertising and also its Instagram platform acting as a portal for retailers to sell products.
There are risks, of course. Some developed markets are already saturated and growth will slow. But Facebook has huge businesses in both Africa and India, which are fast-growing but extremely immature markets.
Viney accepts that much of the criticism thrown at Facebook is fair and that regulation is inevitable. However, he adds: “Our view is that, with the user base that it has, extra regulation will entrench a business like this.
“While people will be focusing on stagnating user numbers in areas like Facebook, there is huge growth still in Instagram; there is still huge potential in assets like Whatsapp and [Facebook] Messenger.”
Yes, Facebook has been forced to invest more aggressively in the business that at any other point partly in response to the criticisms and margins, as a result, are narrowing. But “they’re incredibly high, both in absolute terms and even versus our portfolio, which has a collection of very high-margin businesses”.
Further, Facebook is still seeing double-digit growth but is now down to a valuation which makes it one of the cheapest stocks in the portfolio. “It trades at a discount to other stocks that are growing at a much lower rate with far weaker profitability and without over $40 billion of cash on the balance sheet.”
L’Oreal (OR)
Boyle says L’Oreal, the French manufacturer of skincare and make-up brands, is a business the team has admired for a very long time. “In many respects it represents so many factors that Troy, as an investment team, love in a company.”
But “it’s never been a comfortable business to buy because it’s always been expensive”. That changed in March, after fears on slower growth in developed markets and being behind the likes of Estee Lauder in China hurt sentiment.
The managers added a small position – around 1.25% of the fund – then at around €170. “We bought a small position in the hope we would then get another opportunity to make it a full position,” Boyle explains.
However, shares had rebounded to an all-time high €213 by August after reporting one of their best years ever. Despite an October fall to €185, that opportunity to add has not come about and shares are back up to €212.
Both skincare and make-up are fast growing industries, both in developed worlds, but also in emerging economies. “As people in China, Asia and Latin America get richer, they want to spend more on themselves.”
Management is an important component for Troy’s fund managers and L’Oreal still has large family ownership – the founding Bettencourt family owns a third of shares and Nestle almost a quarter. This means it is “truly run for the long term”.
As well as being very profitable, but not over-earning, it continues to invest heavily. Boyle says it spends around 5% of the revenues it generated on capex, compared with peers like Unilever at around 3%.
“And it’s an extraordinarily entrepreneurial company; they describe themselves as organised chaos,” Boyle continues. “They’ve got lots of different people doing lots of different things, which is essential if you think about the changing nature of make-up and skincare.
“They want to be able to bring in entrepreneurial, creative people and then use their distribution base to expand the opportunity for those products.”
Heineken (HEIA)
After reaching an all-time high of €93.50 in August 2018, Dutch brewer Heineken fell 20% to a 20-month low €75 in October, where it stayed until the end of January. Since, it’s rallied slightly to €88 today. The fund topped up its holding in the firm to what is now a 3% position.
Heineken has over 200 brands with leading market shares in its home market of Europe, but also Mexico, Nigeria and Vietnam. It’s another with good growth prospects in both developed but also emerging markets.
Boyle says Heineken is “the poster child” for the family ownership the managers like in their companies. “The ownership structure has changed slightly over time, but the family still controls the business,” she says.
“They truly do make investments with a view that they want to pass this on to the next generation We love that. They’re not thinking about the next quarter – they don’t care about that type of thing. They care much more about the long term and the strategic relationships they are building.”
This means Heineken doesn’t have the highest margins amongst peers, says Viney, so there’s likely to be mis-pricing going on as investors value companies on earnings multiples.
Despite that, Heineken does have one of the highest rates of growth. In fact, figures released yesterday show its growth is amongst the highest in the consumer staples sector.
In contrast, AB InBev, owned by Brazilian private equity house 3G, has much lower growth rates because its owners have neglected to invest and stripped out costs in the business.
