Global equity roundtable: Part three

Peter Moeschter, executive vice president and portfolio manager with Templeton Global Equity Group, Franklin Templeton Investments. A value manager, Moeschter runs both EAFE (Europe, Australasia and Far East) and global portfolios for retail and institutional clients.

Michael Hatcher, head of global equities and director of research at Trimark Investments, a division of Toronto-based Invesco Canada Ltd. A value manager, Hatcher’s extensive responsibilities include Trimark Europlus and Trimark Global Fundamental Equity.

Matt Moody, vice president, investment management and a member of the Mackenzie Ivy team at Mackenzie Investments. The team’s wide range of mandates includes Mackenzie Ivy Foreign Equity and Mackenzie Ivy European Class. The Mackenzie Ivy team seeks to buy high-quality businesses and not overpay for them.

Q: Consumer staples is another defensive sector. This represents 9.9% of the MSCI World Index. This sector has produced high single-digit returns in the year to recent close.

Moody: It is our biggest weighting in Mackenzie Ivy Foreign and Mackenzie Ivy European Class. When you are looking for sustainable competitive advantages in a company, often a brand is as big an advantage as you can get. The consumer staples that we invest in are world-class companies that have built up these well-known brands over many years. For valuation reasons, we have reduced some of our holdings in this sector, but it’s still a big weighting for us.

The biggest holding in both funds is the dominant global yogurt producer, Danone SA, which is based in France. Emerging markets represent a large slice of its revenue. It had a difficult time recently in its infant-nutrition division and it’s reorganizing its European business. It’s been a relatively unloved company in this sector, but we think that its long-term advantage is intact.

Q: Michael, consumer staples are also a big weight in both Trimark Global Fundamental Equity and Trimark Europlus.

Hatcher: Anheuser-Busch InBev N.V./S.A. is a major holding in both funds. (It has an ADR and trades under the ticker BUD.) These liquor companies, like Anheuser-Busch, tend to be global oligopolies. Anheuser-Busch has some 42% of the beer market in Canada, 47% in the United States, 57% in Mexico and 70% in Brazil. There are tremendous opportunities around the world to bring premium beers to different markets. We think there is still growth to be had. Management is top of class.

Moeschter: For the most part, we think that consumer staples are expensive. We’re very much underweight in this sector.

Q: Looking at the more economically sensitive sectors, consumer- discretionary stocks represent 12% of the benchmark MSCI World Index. This sector has been flat in the year to recent close.

Moody: This sector is also a big weighting in both funds. It’s a mixed bag. A top-10 holding in Mackenzie Ivy Foreign Equity is Omnicom Group Inc. (NYSE:OMC). It’s an advertising and communications holding company. It has some of the strongest agencies globally in what is a fairly concentrated industry. The industry is cash-generative and Omnicom has a history of allocating its capital more responsibly than some of its peers. We’ve increased our weighting here. In our global and European portfolio, we also own Publicis Groupe SA. Based in France, it’s one of Omnicom’s primary competitors.

Hatcher: We also own Publicis Groupe in both the European and global fund. It’s an oligopoly. Publicis’ management team is prudent and is a good capital allocator.

Moeschter: Consumer discretionary is such a broad category. One of our big holdings is retailer Marks & Spencer PLC in the UK. Its food business is pretty steady. Its problems have been in its fashion and housewares businesses. It needs to improve its back-office functions. Marks & Spencer is starting to come through its challenges.

Hatcher: A big holding in this sector in Trimark Global Fundamental Equity is The Walt Disney Co. (NYSE:DIS). Some 30% of its business is its sports network, ESPN, where it dominates this business. It has tremendous recurring revenue in what is an extremely well run company. Its Disney Channel produces long-run talent. It does the same thing in its movies business. It builds brands for the long haul. The Star Wars brand is an example.

Q: Information technology, which represents 13.2% of the MSCI World Index. This has been one of the strongest-performing sectors in the year to recent close. It is one of the largest sector weights in your global fund, Michael.

Hatcher: I am far off the index in my information-technology holdings in Trimark Global Fundamental Equity. I do have major U.S. global tech companies such as Microsoft Corp. (Nasdaq:MSFT) and Oracle Corp. (Nasdaq:ORCL) in this global fund. They have big, recurring revenue streams.

Microsoft is one of the top holdings. Its consumer business is challenged, but its enterprise business is robust. The stock is trading at a valuation that shows investor concern about its consumer business. In all, the underlying tech businesses that I own in this fund have done well. They have moats around them. It’s not so much their innovation. The innovation in the standard information-technology company gets you into a fast product cycle. It leads to the requirement to come up with the next best thing. I would not invest in those companies.

Moody: Information technology is a very small weighting in the global fund. We have one holding, Amphenol Corp (NYSE:APH), which makes connectors and interconnector systems for a range of electronic applications. It has a diversified customer base.

Moeschter: We are about a market weight in information technology. It’s not an area where we’ve been finding a lot of value lately. Microsoft is one of our core holdings.

Q: Finally, let’s discuss financials, which represent the biggest sector weight in the MSCI World Index at 20.7%. It has produced a pretty modest return in the year to recent close.

Moeschter: We got into European financials a few years ago in a big way, when there were bargains to be had. A lot of them were being priced as distressed companies, which we thought was overdone. These stocks have done quite well in the last two years. They’re not the bargains they were, but they’re also not overvalued. We continue to hold them. They’re now being valued more as ongoing businesses.

Most of the big European banks are over their stress tests. They raised capital a few years ago. What we need to see is the banks lending again. Holdings include banks such as BNP Paribas S.A., which is based in France and UniCredit SpA, which is based in Italy. Insurers that we hold include Aviva PLC, based in the UK.

Hatcher: I’ve not been a fan of Western European financials for a while. I still feel that they are complex and difficult to understand. There is still risk, and even if it’s a small risk, it’s hard to evaluate. We own one Eastern European bank, Bank Pekao S.A., based in Poland. It’s a simple bank that does consumer lending and small-and-medium-sized business lending. It’s basic banking. It’s the largest financial weighting in Trimark Europlus.

The largest financial weighting in Trimark Global Fundamental Equity is Wells Fargo & Co (NYSE:WFC). It has a lot of characteristics of the Polish bank in that it’s into basic banking. Wells Fargo is also well capitalized and well managed.

Moody: We don’t own any European banks and we haven’t for the past 10 years. Our only European financial is Admiral Group PLC, which is in car insurance, primarily in the UK. It’s one of the best underwriters in the industry.

Q: Time to sum up.

Moeschter: It’s a fragile global economic recovery, so this could lead to a longer period of economic expansion than would ordinarily be the case. It’s healthy that there has been a bit of a breather in the global equity market in the past six months.

Moody: We’ve been finding it tough to find great companies trading at good valuations.

Hatcher: We’re in the midst of a long-term economic workout. Investors have become overly optimistic about the overall equity markets and they are fully valued.

This concludes the three-part global equity roundtable.