In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Simon Callow from Midas Capital about three of his favourite FTSE 100 equity investments that provide significant exposure to emerging markets.
Funds and Equities Mentioned in this Video:
CF Midas Balanced Growth Fund
Experian (EXP)
Diageo (DGE)
Reckitt Benckiser (RB.)
Video Transcript:
Alanna Petroff: If you’re looking for exposure to emerging markets, you might want to start with the FTSE 100 Index. Many of the companies on the FTSE 100 have a large percentage of their sales coming from emerging markets. So, joining me now to talk about emerging market exposure and how to get that into your portfolio is Simon Callow. He is a manager at the CF Midas Balanced Growth Fund.
Simon, thanks for coming in.
Simon Callow: Thank you.
Petroff: So, now let’s go over your investment strategy a little bit and Midas Capital in general.
Callow: Midas Capital is a specialist multi-asset portfolio fund manager and we invest in equities, fixed interest and alternatives. We adopt a top-down themed approach to our equity selection and one of our themes for our equities is emerging market consumer and the rise of the middle classes.
Petroff: Okay. So, within your fund right now, you are focused on FTSE 100 companies that have that emerging market exposure, specifically emerging market consumers.
Callow: That's right.
Petroff: Okay. So, your top three picks today, the three stocks that you think are most compelling right now that's Experian, Diageo and Reckitt Benckiser. So, let’s just start with Experian. Why do you like Experian?
Callow: Experian is a specialist credit-checking firm that has a large amount of data that is required by credit institutions and retailers to analyse the credit risk that they might be taking with their customers. And commerce can’t really function without the information that Experian own and supply. The other interesting thing is that Experian has 20% of its exposure, i.e. its revenue exposure, coming from Latin America, having made two significant acquisitions, one in Brazil and one in Columbia.
Petroff: Okay. So, if you’re looking to get into the Latin American market, Experian could be a way in?
Callow: It's an indirect way through the FTSE to get Latin American exposure. Yes.
Petroff: Okay. Now, let’s talk about Diageo. Why do you like Diageo? I mean, lots of people like Diageo, but let’s talk about your view specifically of Diageo.
Callow: You’re quite right, Diageo is a darling of fund managers and it's quite highly rated. But what's very interesting about Diageo is that it's got number one or number two spot within the various markets with very strong position in whisky, tequila and vodka as well.
It also owns the brand Guinness, which is actually quite popular in emerging markets, particularly in Nigeria and Indonesia. And I did discover that there are more sales of Guinness in Nigeria than Ireland, prepping for this interview, which I thought was quite intriguing, how things are changing.
Petroff: Right. So, they are having a lot of emerging market growth now at Diageo, though stagnant revenue growth I think in developed markets. Are you okay with that, looking at that?
Callow: I am. And it's very interesting also that Diageo have made six acquisitions over the last six years and when one looks where these acquisitions have been, it's quite a compelling story. They’ve made them in China, Vietnam, Ethiopia, South Africa and over in Latin America, and they are buying some of the best brands in domestic markets to capture the rising wealth of the middle classes in those regions. It is a long term story, we can’t look too short-term.
Petroff: Okay. Now, let’s move onto Reckitt Benckiser. Why that brand? Why that company, I guess?
Callow: Reckitt Benckiser specializes in household cleaning products and over-the-counter pharmaceuticals. The interesting thing with Reckitt Benckiser is that it's a little bit behind the curve to some of its peer group and has now realised that it needs to get its act together and get more exposure to Asia and emerging markets. 20% of its revenue has come from emerging markets, but they are now targeting 50% revenue by 2016.
Petroff: Okay. That's pretty aggressive growth.
Callow: It is.
Petroff: You think they can do it?
Callow: It is a target and I think it might be a bit of a struggle. Their first acquisition was Paras in India, so – and the Indian market is quite difficult at the moment for various reasons: inflation, interest rates and political obstruction to foreign investors. They can do it, but the jury is out a little bit.
Petroff: Okay, but you do see that this is a good growth stock right now, maybe not 50% sales in emerging markets, but growing that area?
Callow: Yes, and investors will like the fact that they’ve seen the light and that they are going to grow their emerging market revenues, which should lead to earnings per share growth and a re-evaluation of the share price.
Petroff: Okay. Let’s talk about some of the key risks for each of these companies. What's the key risk for Experian?
Callow: Experian – maybe a downturn in the US market. 50% revenue still comes from the US, and also, its exposure to Brazil. The Brazil economy has slowed a little and there are translational currency effects with the Brazilian real, which has also been weak. My view actually is that they might have bottomed out, but we’ll have to see.
Petroff: And what about Diageo, then. Diageo looks expensive, right?
Callow: Well, maybe. One of the risks is its rating, to be honest, it’s high double-digit. So that doesn’t give an element of safety to an investor. But if one saw the market de-rate due to a market sell-off that would be an opportunistic buying opportunity in my view, if one’s looking for the longer term.
Petroff: Okay, so buy on the dips, but maybe not at the current level.
Callow: Absolutely.
Petroff: Okay. And Reckitt Benckiser, you mentioned India before as being slightly unstable; a difficult market to get into.
Callow: Yes, and one would have to keep an eye on India. There are two opposing forces really: which is the state of the economy, but one has also got the powerful secular trends of the emerging consumer coming through and the rise of middle classes and population growth, which is some of the best in the world in India.
Petroff: Okay, Great. Well, thank you for joining me today and talking about these emerging market trends in the FTSE 100 companies.
Callow: My pleasure.
Petroff: That was Simon Callow and he runs the CF Midas Balanced Growth Fund. I'm Alanna Petroff. Thanks of watching Morningstar.
