Holly Black: Welcome to Morningstar's "3 Stock Picks". I'm Holly Black, with me is Alexander Chartres, he's manager of the Ruffer Total Return Fund. Hello.
Alexander Chartres: Hi, Holly, how are you?
Black: So, you've got three stocks for us today. Where would you like to start?
Chartres: Well, let's start with Fujitsu. It's a big Japanese IT services business, and Japan has, despite being one of the world's most significant economies, a very under digitised economic structure. And Fujitsu's IT services business is very well positioned to play the IT CapEx cycle in the Japanese corporate sector. But of course, excitingly we just had a change of Prime Minister in Japan to Mr. Suga from Mr. Abe. And one of Suga's priorities is digitization of Japanese government administration, for example. So not only have you got Japanese corporates investing heavily in the IT theme, you've now got the Japanese government. Suga's even setting up a specialist digitization agency. So the tailwinds for Fujitsu are very considerable in that core business.
Black: So, I tend to think of Japan as being quite an advanced economy. Why has the digitisation taken so long to catch on?
Chartres: Well, it's a very very good question, and so I saw an extraordinary estimate from a Japanese think tank that suggested that only about 10% or a little over, of Japanese administration was conducted online, which is an extraordinary number. I think a big part of it is cultural, but the key thing from our point of view is that the opportunity going from that low base is absolutely enormous, so we play that in the fund through Fujitsu and also through another company called NEC, and both look extremely attractive from a compound earnings growth perspective going forward.
Black: Okay, let's get onto stock number two.
Chartres: Well, stock number two Holly is a company called Aena. This is a Spanish airport owner and operator. So, we think it's a really interesting element to have in the portfolio for that sharper recovery scenario. And it's also worth noting that unlike a lot of other infrastructure assets, Aena has a very diversified range of carriers flying into it. So not only does it have airports all over Spain, rather than just one asset that you are overly dependent on its serviced by the likes of Ryanair or Vueling or EasyJet. These are regional carriers that we think are more likely to recover faster than the long haulers. And in addition to Aena's core business which is regulated tariffs on airlines and passengers, they've also got other elements in the portfolio that don't have a regulated return. So, for example, they're developing lots of sites next to their airports around infrastructure and logistics, really around the Amazonification of global commerce. So, that's an interesting asset that doesn't get much credence in the market, but we think could be valuable as well.
Black: Okay, let's go on to stock number three.
Chartres: Well, stock number three is a company called Charles Schwab. Charles Schwab is really a big American bank and asset manager. It's one of America's biggest banks, but it doesn't have credit risk. Unlike some of the other huge household names. And if you get a rise in interest rates, you get phenomenal additional earnings power. In addition, it's a big asset manager and they are completing a takeover of TD Ameritrade, which is offering them some phenomenal synergies as well, and that will be very good for the earnings per share over the next few years. So, it's really a 3 headed beast, and we think, given where rates are at the moment it's a really interesting long-term quality compounder that also gives you exposure to a material increase in interest rates.
Black: So, a lot of the UK banks and financial stocks have been massively out of favor for this year, and even before and have had to cut their dividends, are those trends affecting this company.
Chartres: Well like all banks clearly anything that's dependent on interest rates has had a difficult time. UK banks are an important part of our portfolio, but they're held as an offset to our inflation protected bonds. So there's a very clear macro trade there, but Schwab has these particularly attractive synergies from the merger and the large asset management division as well, and they're also over time going to reduce their volatility to interest rates, but for the time being, they remain that very powerful coiled spring.
Black: Alex, thank you so much for your time. For Morningstar, I'm Holly Black.
