Global equities: Finding value in five sectors

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.

Peter Moeschter, executive vice-president and portfolio manager at 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.

Q: Let’s continue to discuss key sectors. Please identify your main holdings in these sectors. First, consumer staples.

Moeschter: We continue to be underweight this sector in the global portfolios. Suntory Beverage & Food Ltd. (STBFF) of Japan is our largest holding. It’s a global company specializing in non-alcoholic beverages. It’s gaining market share in Japan and recently did a deal to acquire vending machines in that country. The company is very strategic in how it grows its business both in Japan and globally.

Hatcher: One of our biggest holdings in this sector is Diageo PLC, which is a multinational alcoholic-beverages company based in England. The company owns a number of leading global brands. The stock has an American depository receipt and trades on the New York Stock Exchange under the ticker DEO. (This sector constituted 16.5% of Trimark Global Fundamental Equity at the end of October.)

Moody: Our biggest staples holding in Mackenzie Ivy Foreign Equity is Procter & Gamble Co. (PG). Another top-10 holding is the multinational food-products company Danone SA (GPDNF), based in France. We also have a significant holding in Colruyt SA (CUYTF), a food retailer based in Belgium. Other staples that we own include PepsiCo Inc. (PEP) and Colgate-Palmolive Co. (CL).

Procter & Gamble is a newer name. The company has a great portfolio of brands, strong corporate culture and substantial market presence globally. It’s undergoing an internal refocusing of its business and because of this the stock is not as expensive as some of the other staples. (Consumer staples represented 18.3% of Mackenzie Ivy Foreign Equity at the end of October.)

Q: Consumer-discretionary stocks? These companies are more economically sensitive than the staples.

Moeschter: We are at about a market weight in these stocks in the global portfolios. One of our larger holdings in this sector is Sky PLC (BSYBF), a pan-European media company based in London. The valuation is reasonable.

Q: Matt, this sector represented 13.9% of Mackenzie Ivy Foreign Equity at the end of October.

Moody: Our number-one consumer-discretionary holding is Omnicom Group Inc. (OMC), which provides advertising, marketing and corporate communication services. Our newest holding in the sector is Samsonite International SA (SMSOF), one of the world’s leading luggage companies, which is listed in Hong Kong. It’s a well-run company with a strong brand in a fragmented industry.

Hatcher: Consumer-discretionary stocks were 7% of Trimark Global Fundamental Equity at the end of October. A big holding in this sector continues to be Walt Disney Co. (DIS). Disney’s big news is the new Star Wars movie to be released on Dec. 18. I am not a fan of the movie-studio business, as it’s so hit-and-miss. But Disney is almost a manufacturing company, with its branded consumer products that complement its movies. Disney understands that it’s a brand company. We sold our holding in McDonald’s Corp. (MCD) this year.

Moody: So did we. It was a long-term holding. We had concerns about management’s strategy for delivering growth over the next 10 years.

Q: Health care? Like consumer staples, this is considered to be a more defensive sector.

Moeschter: We are overweight in health care. We bought more heavily into it a few years ago when the valuations were lower and there were low expectations on the drug pipelines. Some have since translated into revenues for the companies. There has also been consolidation in the sector. The deals that we’ve seen so far have been done at reasonable valuations, but this needs to be monitored. It’s been a strong sector and our holdings have done well. We’ve been cutting back a little. Our largest holdings include Gilead Sciences Inc. (GILD) and Amgen Inc. (AMGN).

Q: Matt, you had 10.7% in health care in Mackenzie Ivy Foreign Equity at the end of October.

Moody: Our biggest health-care holding is Henry Schein Inc. (HSIC), which sells dental supplies and equipment worldwide. Another holding is Sonic Healthcare Ltd. (SKHCF), a global medical-diagnostic company, based in Australia. We also own Johnson & Johnson (JNJ) and Becton, Dickinson & Co. (BDX), which produces consumable items, including syringes.

Hatcher: JNJ is our largest health-care holding, followed by Becton, Dickinson. Both were top-10 holdings in Trimark Global Fundamental Equity at the end of October. We had 12.4% in health care at that date. Valuations in this sector are challenging, but I am happy to hold what I hold.

Moody: Henry Schein and Becton, Dickinson are long-standing holdings. In the last year to 18 months, we added JNJ and Sonic.

Q: Technology?

Hatcher: We had 20% in Trimark Global Fundamental at that date. My two largest weights are Microsoft Corp. (MSFT) and Oracle Corp. (ORCL).

Moody: In contrast to Michael, we continue to have very little exposure to information technology. They are great businesses with high returns on capital and strong cash flow, but we take a long-term view, 10 years, and this tends to steer us away from technology.

Hatcher: The business models that we are looking for have recurring cash flows. We’re not looking for the fast-cycle technology companies, where the companies have to regularly reinvent themselves. Look at Microsoft. It’s the core provider of software to business. If you look at the cash flow it generates from its enterprise business and the valuation on the stock, it’s an attractive long-term holding. Oracle has the same profile. It’s selling to the business segment. Its customers are sticky. Similar to Microsoft, Oracle has these recurring cash flows. Both companies pay a dividend.

Moody: Oracle is a new name for us. We’ve been establishing a position in the stock. We like the company’s corporate culture and its history of superior execution. Oracle has profitable relationships with many of the world’s largest companies and substantial financial resources. We think that the company is well placed to successfully transition its business to the cloud and support its older solutions. All these attributes should support Oracle’s long-term growth.

Moeschter: We are underweight in the sector. Our largest holding is Microsoft. We’ve held it for years. It’s a larger weighting now, as the stock has performed so well recently. Microsoft is making progress on many fronts, particularly on cost control.

Q: Financials?

Moeschter: The weight in the MSCI World Index is 20.6% and we’re slightly over that. Financial stocks have done well off their bottom three years ago. They’re not as cheap as they were. But we’re still not finding them to be expensive, so we continue to hold them. Their operations are improving. We have a lot of holdings. Citigroup Inc. (C) would be a typical U.S. holding.

Hatcher: Our two largest holdings in this sector are Wells Fargo & Co. (WFC) and Northern Trust Corp. (NTRS). Like Peter, we hold these financial companies for their underlying operations and their valuations. Both financial institutions would benefit from a rising interest-rate environment over the next five to seven years. Trimark Global Fundamental Equity had 14% in financials at the end of October.

Moody: The only bank that we currently own is U.S. Bancorp (USB). It’s a plain-vanilla bank that did not get into trouble in the financial crisis. We had 10.4% in financials at the end of October.

Q: Time to sum up.

Hatcher: The equity market is generally expensive. I don’t see that changing any time soon. You have to pick your spots carefully.

Moody: With stretched valuations, a lot of stocks are priced for perfection. If the companies slip up, this could provide an entry opportunity. In general, companies are still trading at high valuations despite the slow growth in developed economies and the risk in developing economies.

Moeschter: As value managers, we’ve been finding stock selection to be more challenging. We have still been finding opportunities, for example, in the energy sector.

Hatcher: Canadian investors in the global equity market over the 12 months to the end of October have done very well in Canadian-dollar terms. But what if the Canadian dollar strengthens? What the currency can give with the one hand, it can take away with the other.

Editor’s note: This is part three of a three-part global equity round table.