Concentrated funds with fewer stocks in their portfolio can be risker options compared to their diversified peers. But managers who manage to choose the right stocks can produce superior returns for their investors.
Gerrit Smit, manager of the four-star rated Stonehage Fleming Global Best Ideas Equity fund aims to find "outstanding" businesses across the globe and has just 27 names in the portfolio. Smit's definition of outstanding centres around four pillars which he uses to identify companies that are "best in class". These four pillars are: sustainable revenues (he doesn't like recovery companies); good quality management and culture; strong balance sheets and business efficiency such as the ability to reinvest in the company for future growth; and increasing cash flow.
The strict criteria means only a handful of businesses make the grade, and three-quarters of the portfolio is investing in US companies. Over five years, the fund has produced annualised returns of 14.76%, beating its Morningstar category.
Here, Smit reveals three of the companies that have been contributing to returns:
Buy: Nike (NKE)
Smit is a fan of many companies related to health and technology, and thinks the sports industry is a good way to tap into these. He says: “It’s a growing sector as we are all becoming very health-conscious.”
He has recently increased his stake in footwear and athleisure brand Nike, having first bought the shares in February 2018. The firm's share price has increased from around $85 to $100 over the past year.
Nike is well-known for wide range of athletic footwear, which has greatly benefitted from the trend towards so-called athleisure wear being used for every day apparel rather than just to exercise in. This has been further driven by a relaxation in the dress code of many employers as well a rise in home-working and self-employed workers, who are more likely to dress casually.
Smit was particularly impressed by the "Triple Double Strategy" for growth that Nike unveiled two and a half years ago. Under this strategy, the company pledged to invest in new technologies and double its spending to make better production, as well as speed up its production and improve its direct connections with consumers (investing in its website and app) rather than relying on sales through third party stores.
“We expect profit margins to increase as a result of this strategy," says Smit. "It’s an outstanding business and we’ll continue to invest in it."
Hold: Visa (V)
Gerrit has held shares in payment giant Visa for six and a half years and it is now the largest holding in the portfolio, accounting for 6.6% of assets. While he expects the company to be a great success, some investors may have been pleasantly surprised that its share price has risen more than 200% over the past five years.
Visa has been a major beneficiary from the shift in spending habits, as people move away from cash and paper payments and towards a so-called cashless society. “I carry less and less cash with me every day,” points out Gerrit. The company takes a small cut any time its cards or payment terminals are used in a transaction, and it has also enjoyed the rise on online shopping as a result.
Last month, the company acquired fintech business Plaid Technologies for $5.3 million; the company focuses on enabling consumers and businesses to interact with their bank accounts, check balances, and make payments through financial tech applications. “This gets Visa closer to the bank,” explains Smit. A fan of the payments sector, he also has a stake in Paypal, which makes up 4.6% of the portfolio.
Of Visa, he adds: "We have held on to this company for a long time already and we plan to keep holding on to it too. It has good long-term growth prospects, especially in emerging markets."
Sell: L Brands (LB)
Smit doesn’t often sell holdings but one he has ejected from the portfolio recently is L Brands, the parent company of lingerie brand Victoria's Secret.
“Victoria Secret is a very strong brand, has a good business and everybody knows it,” he says. However, he is concerned the company has been slow to catch-up in the online space and has lost customers to rivals as a result. “Most of its sales come predominantly from US malls,” he explains, “And with the evolvement of e-commerce, fewer people go to malls.”
Smit is adamant that getting exposure to e-commerce is now critical for companies. It's a conviction he expresses through his investments in the likes of Amazon and Google-owner Alphabet: “People buy things on Amazon, make transactions through Visa, but they also use Google to look for e-commerce products.”
But as well as this, he is no longer convinced of the L Brands business model, which is based on using fashion shows to promote its products. “It’s a very high-profile way to promote things, but I am not sure it will work in the long-term.” Indeed, the firm has come under much criticism for its fashion shows and a lack of diversity among its models. It cancelled its usually-televised catwalk show in November.
Smit made a profit from his investment in L Brands (though he doesn’t want to disclose how much). “The stock has fallen since we have sold it, but we are not going to buy it back,” he says. Indeed, shares have fallen from $90.34 five years ago to around $24.48 today.
