Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Giles Parkinson. He is Manager of the Aviva Global Equity Endurance Fund. Hello.
Giles Parkinson: Hi, good afternoon.
Black: So, you're going to talk us through three of the best ideas in your portfolio at the moment. Where would you like to start?
Parkinson: Well, someone said there aren't any marks for originality in investing. We've all heard of Visa. There are two reasons why we like the company. The first is they are a beneficiary of a normalisation in travel and leisure. The company is having a tough time at the moment because around a quarter of their revenues come from the fees on overseas travel And importantly, this is overwhelmingly tourists, not business travelers, who have been more cautious on the pace of the recovery there. Vaccination programs mean we should see substantially all of this travel activity come back. Meanwhile, the permanent benefits from Covid have been obscured. The pandemic has accelerated the use of cards, contactless payments, and the general demise of cash. And then, once we get through the medium term, we see the revenues of this business is functionally a royalty on global GDP. Every time a transaction goes over their network, it takes certain cut. So, Visa's revenues will continue to grow over many decades from this passive tailwind as the global economy expands and this card continue to take share from cash. So, it's a situation where we have a durable company going through a temporary difficulty, even the stock at two-year relative low and on a reasonable multiple of normalized free cash flow, we like these sorts of setups.
Black: Well, it must be kind of pandemic proof because it doesn't matter if I'm spending in an airport, in the city, or online, as long as I'm spending for the Visa, right?
Parkinson: Yes, the company is able to capture its revenues from lots of different ways.
Black: Okay. What's stock number two?
Parkinson: That would be Moody's. Now, Moody's had a great year in 2020 because most of the profits come from fees raised in corporate bonds. Now, thanks to central bank actions during the pandemic, we had a bumper year for debt issuance, as companies sort of lock in low cost debt, that's actually a bear case now. A lot of medium-term issuance has been pulled forward. So, revenue growth this year will be somewhat muted. We're happy to be patient. One reason is that Moody's is another royalty-type business. As global GDP grows, corporate profits expand, which allows companies to borrow more debt from which Moody's takes a fee. This is a fantastic multi-decade tailwind.
Black: And that kind of works even in an up market where companies borrow money to expand or in a down market where maybe they borrow money because they're feeling squeezed?
Parkinson: Yes, I mean, debt issuance ebbs and flows quite a lot. But what actually remains very resilient is the total stock of debt outstanding. And it's actually that which provides something of the recurring revenues for this company. But in addition to that, the other reason that we think Moody's is a rare example of a company with real pricing power, by that I mean they have the potential to raise prices more than inflation. The reason for this is that the fees which they charge, I think, just 1 or 2 basis points a year, they are a tiny fraction of the cheaper interest costs for debt carrying a Moody's rating. This is about 20 basis points or 10 times as much and we like companies that are able to provide far more value to their customers than they charge for their goods and services. So, that's why we like Moody's.
Black: Okay. And what's our final stock today?
Parkinson: Well, this is Equifax. I'm sure many people watching this have unfortunately heard of the company which was at the epicenter of one of the largest data breaches in the US history back in 2017. And we practice ESG integration on the Endurance Fund through the framework of positive and negative externalities. You can think of this as seeing ESG through a risk lens and an opportunity lens. These issues matter and they only matter because they ultimately impact future cash flows which makes some companies in either worth more or worth less. We like the Equifax set up because it's flipping from a source of negative externalities to paradoxically being worth more as a result of their data breach. This is because of the massive remedial technology investment the company is making that they're leapfrogging their way into the cloud, and we've been engaged with the company regularly since the breach and have been reassured by what we've heard from both them and customers. And currently, the market isn't certain about the direction of their revenues related to refinancing and mortgages. But looking beyond the point when this activity rolls off, we see a very attractive business on a reasonable multiple of underlying free cash flow.
Black: Giles, thank you so much for your time. For Morningstar, I'm Holly Black.
