Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Charlotte Yonge. She is Manager of the Trojan Ethical Fund. Hello.
Charlotte Yonge: Hi, Holly.
Black: So, you've got three stocks and they all have passed your ethical screening. Where should we start?
Yonge: So, we are going to start with Alphabet (GOOGL), and this is a business which is just a royalty on that move of the world's economy online. And this is really what we are looking for first with a company is does it have the end market that is growing, is it operating in something with a really long runway for growth? And with Alphabet, the answer is absolutely yes. If you look at world commerce, it's 14% online today. So, people talk about ecommerce and they say, oh well, it's already happened. Everyone knows about that. We're still really early on. And Alphabet has so many incredibly valuable digital assets, so you think about Google Search, but also YouTube, Maps, Google Chrome. These are just businesses that are just getting going in terms of making money. So, we absolutely love the fact that Alphabet not only has a great end market but a really strong competitive position. It has 9 digital properties with over a billion users. So, we think that there's just a really, really strong future for this business.
Black: And what about the ESG side of this? Because I know people obviously have data and privacy concerns with this sort of business.
Yonge: Yeah, we think the most important thing is that this business operates for the consumer and they are totally obsessed with the user experience and that's always led the company, that's always led the culture. And they are leading regulators. I think what's been behind in this whole space is that regulation hasn't moved fast enough. So, the companies themselves are having to invest behind privacy. And Alphabet is, A, willing to do that, they've shown willing, but B, able to. They have huge amounts of firepower to actually invest behind privacy tools that they are not legally mandated to do, but which they know are in the best interests of the consumer. So, we continue to monitor that. It's clearly a big risk with any of these companies, but we really do think that they are on the front foot.
Black: Okey-dokey. On to stock number two.
Yonge: So, stock number two is Visa (V). Visa, again a little bit like Alphabet, it's at the vanguards of a lot of this technological change that's ongoing. And during the pandemic, everyone did sort of freak out because clearly consumer spending dropped off a cliff, but at the same time, and this is really important for the long run story for Visa, spending was moving more online and that helps because you can't use cash online. So, the more we go digital, the more Visa benefits. It is clearly one of the major two networks alongside Mastercard, which we also own, and it's deriving that royalty on consumer spending, which still around the world 50% of consumer spending is by cash or check, which is remarkably high. In lots of European countries, it's higher than 50%, so not just in emerging markets. But there's also this huge pool of opportunity when it comes to business payments. So, a lot of businesses are still just paying three-day account-to-account payments, not in real time. And Visa is just getting going in terms of helping businesses pay their suppliers more efficiently, pay their staff more efficiently, and currently that's 4% of their volume. So, it's a tiny bit, but it's four times the size of the consumer payment space. So, it's a really huge opportunity.
Black: Okay. And what's our final stock?
Yonge: The final stock is Nestlé (NESN). Now, Nestlé is a very good example of a business which is highly adaptive to change. So, they are moving online very, very quickly. But they also have great growth engines, which we think are going to be around for decades to come. And actually, that is not the chocolate business which everyone associates with Nestlé, but it's the coffee and the pet food business, which together are actually driving together most of their growth at the moment. So, we think that Nestlé has these amazing engines which are just going to take it forward for the years and years to come.
And at the same time, Nestlé is really good on thinking about its social and environmental impact and that is a very, very good hallmark of the culture of the business more generally. So, when we think about plastics, that's a huge environmental risk for all consumer staples companies. Nestlé is actually leading on providing a solution to this problem. And we really like companies that just take the matter into their own hands because they can, but also because they want to, they get it. They understand that they are the ones who need to take responsibility and Nestlé is committed to buying more recycled plastics. And by doing that, it's incentivizing the manufacturers to make more. So, it's creating a whole new economy which just doesn't exist today.
Black: Charlotte, thank you so much for your time. For Morningstar, I'm Holly Black.
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