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Oh-oh-oh! Caution: the road is wet;
Black soul is black as jet. Did you hear me?
Caution: the road is hot;
Still you got to do better than that!
'Cause when you wet, it's slippery, yeah. It's slippery, yeah!
When it damp, it crampin'! When it damp, it crampin'!
If it slidin' up and down-a,
Don't want you on the ground. Brother!
Caution, Bob Marley, 1971
At the end of March, we wrote about the rise in the volatility of markets and how, in many respects, this was a reflection of the growing angst amongst investors: there was simply more to worry about. Since that point, if we look at the broader equity markets, such as the MSCI World Index, we can see that they have rallied strongly, clawing back the losses of the first quarter and pushing into positive territory.
On the face of it, this is good news and could be interpreted as a sign that equity markets are actually pretty resilient and that thus all is well with the world. But, before we get too excited, we need to ask if, in fact, anything has actually changed?
Donald Trump made headlines (definitely nothing new here!) on the back of his historic meeting with North Korea’s leader Kim Jong-un in Singapore announcing that "there is no longer a nuclear threat from North Korea". However, just 10 days later he renewed sanctions on Korea and stated that the country continued "to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States." Has anything changed here?
Elsewhere, his trade war rhetoric has remained fairly consistent and the back-and-forth between the US, China and the EU seems likely to continue for the foreseeable future. That said, he has mid-terms in November, so I’m sure he’d like something positive to talk about before then. The point is, however, that the rhetoric is the same as it was in the first quarter of 2018.
What about BREXIT? There is about four months to the (current) BREXIT deadline and, at least on the face of it, not a lot has been agreed. We are, for instance, still trying to come up with a workable plan for Northern Ireland. Again, it’s hard to point to any macro-economic or political change that might have triggered the recent rally in markets.
Global debt remains at eye-watering levels and continues to cause a great deal of consternation; the amounts are so large that they are hard to look at proportionally. Looking solely at the US, we will try to set the scene. There is currently $21.2 trillion of outstanding US Treasury paper, which is about 105% of US GDP. Of course, that’s not all of it: there is $3.1 trillion in state and local debt, which brings us up to $24.3 trillion or 120% of GDP. On top of that, we have corporate debt, mortgages, credit cards and student loans. According to John Mauldin of Mauldin Economics, all this adds up to an incredible 330% of GDP – enormous future obligations alongside the ever-increasing day-to-day requirements of healthcare, social insurance and pensions.
As an aside, whilst talking about debt, we highlighted our concern about the quality and track record of some of the lenders in our year-end commentary. "Argentina – has a history of failing to pay and has defaulted on its international debt seven times (and its domestic debt five times) since becoming independent in 1816. Most recently, in 2001, Argentina defaulted on its bonds and spent the next 15 years restructuring its debt. Given that track record, one is forced to raise a Roger Moore-style eyebrow (or perhaps tip one’s hat!) at Argentina’s recent ability to issue a bond maturing in 100 years’ time for an 8% coupon."
Less than a year since that bond was issued, Mauricio Macri, Argentina’s President, has approached the IMF for a $30 billion loan to combat a currency crisis. The bond has since fallen in price quite dramatically!
In attempting to understand the macro-economic environment, we do not try to forecast short-term economic or political outcomes. The point we are making here is simply that although markets have rallied recently, it is difficult to point to any supporting macro-economic news.
Our underlying asset allocation is predicated on valuations, so has anything changed here? Our longstanding standpoint has been that equity valuations are not cheap and thus that it has been prudent to position our portfolios more cautiously. However, this year, as shown in the chart below, valuations have become cheaper at the broader market level, triggering a review of our equity exposure. Should we be topping up our equity positions? After all, value is often created on the back of weaker investor sentiment – which we have seen this year.
Although the above chart provides a valuable snapshot of market valuation, it does disguise some of the picture. Whilst the valuation of the MSCI World has reduced in 2018, this has not been so noticeable in our preferred asset classes such as Healthcare and Technology; indeed, the latter has actually become more expensive. The areas that have seen the biggest drop in valuation have been Energy (-35% in P/E terms), Financials (-19% in P/E terms) and Telecoms (-19% in P/E terms), none of which are our preferred sectors. One sector that has fallen and we do want to own is Consumer Staples (-14.9% in P/E terms). This has been reflected in the equity-income component of our portfolios, which we have topped up.
One area that is looking increasingly interesting on a valuation basis is Latin America. This might be unsurprising given the shenanigans already mentioned in Argentina, but stress has been visible across the region. All of this is reflected in company valuations – now trading at the cheapest levels for a number of years – and local currencies – which have de-rated strongly against the US dollar. Over the summer, Brazil, Columbia and Mexico have elections, so there is likely to be further volatility. We are watching and waiting for an investment opportunity.
Taking all of this into account, our general outlook and portfolio positioning hasn’t changed very much: and our strategies remain conservatively positioned. We know the road is wet and we are proceeding with caution.
Cautious Portfolios: Lower Risk by Bob Tannahill
Objective: The Cautious Portfolio’s objective is to increase its value by predominantly allocating capital to fixed-income investments. The portfolio can also invest into global blue-chip equities with strong cash-flows and progressive dividend policies. A neutral position would be a 75% bond/25% equity split and the maximum equity-weighting of approximately 35%. The cash generated can be re-invested to provide capital or taken as an income stream.
After volatility returned to markets in the first quarter of the year, the second quarter was much quieter with the Cautious Strategy returning a modest 0.3%. As Mark has outlined, above, there was plenty going on over the quarter: from trade tariffs to contentious elections plus a healthy dose of economic data thrown in for good measure. Against this busy background, asset prices were a bit of mixed bag with lots of indicators moving – albeit in different directions – resulting in limited net effect.
On the equity side our holdings generally rose on the back of a recovery in the US dollar (and a modest rebound in investor interest in more defensive sectors) thanks to the darkening macro picture.
Looking forward, we have been conducting a deep-dive on a potential new equity fund over the last 6 months or so. We are now quite advanced in this work and are hoping to be able to initiate a position later this year, valuation permitting. This addition should further diversify our equity exposure and help the strategy in higher growth environments. With hindsight, it would have been beneficial to have had this new fund in place in late 2017; however, in the long run we firmly believe that ensuring we have the right funds is more important than the impact of short-term, and usually cyclical, market moves. We will have more news on this in the near future.
On the bond side the mixed picture continues. Investors continued to expect stronger US growth and inched-up their expectations for future US interest rates; this was a negative for dollar-bond prices over the quarter. At the same time, weakening growth elsewhere in the world coincided with ramped-up rhetoric from the US over trade tariffs and caused investors to get more cautious. In turn, this increased the compensation demanded for taking on corporate credit risk, thus exerting downward pressure on corporate bond prices. Against this background, our funds behaved as expected. More defensive positions held up well, with funds like Smith & Williamson Short-Dated Corporate Bond Fund and our UK government bond positions ending the quarter marginally up. Sterling bonds were stronger than dollar bonds for the reasons outlined above and this saw our UK corporate bonds, through funds such as TwentyFour Corporate Bond Fund, outperform our equivalent global positions, such as PIMCO Global Investment Grade Credit.
One laggard over the quarter was a small position (2.5%) in Asian corporate bonds, managed by Muzinich. The Fund fell a little over 3% on the quarter as general investor nervousness overlapped with a focus on China. The recent US tariff offensive has coincided with a crackdown within China aimed at de-risking the more informal parts of its banking system. These factors have focused attention on credit risk within China and caused a repricing more broadly across Asia. One of the key reasons we choose to use active managers such as Muzinich is because we know that markets will undergo periods of stress. During such periods it is the manager’s diligent credit work beforehand that determines how they navigate the storms. As usual, we are in close contact with the team at Muzinich and will take action, either to increase, hold or sell, depending on how we see value and risks evolving in the space.
Balanced Portfolios: Medium Risk by Tiffany Gervaise-Brazier
Objective: The Balanced Portfolio’s objective is to provide capital appreciation through a balance of fixed income and global equities. A neutral position is a 50% bond/50% equity split and the maximum equity weighting is 60%. The cash generated can be re-invested to provide capital or taken as an income stream.
Broadly speaking, the Balanced Strategy currently has a 50:50 bond (and cash)/equity allocation. As we have been saying for some time, valuations of both bonds and equities are still relatively expensive – although, as highlighted in Mark’s introduction, some areas of the market are starting to show some value. It is important to reiterate that this defensive stance is not an attempt to call a market top (who knows where markets are headed from here?) but rather an action that should offer some protection should the recent bout of market volatility continue. If we do happen to experience another pullback, the defensive nature will allow us the flexibility to redeploy capital and purchase some world-leading companies at attractive valuations.
The political and economic environment remains as uncertain as ever. More recently, we have seen Italy form a government around a coalition of two parties – Movement Five Star (M5S) and League (formerly Northern League) – and the populist roots of these political parties is generating volatility in Italian markets. You would prove to be a better Mystic Meg than us if you could predict the impact this will have on wider assets classes and markets. What we have learnt, however, during both the Brexit referendum and the election of President Trump, is that economies can outperform the expectations (or predictions) of economists long after any political shock. Our investment decisions are thus not based on the political noise, but, instead, on the valuation of those assets aligned with our long-term investment themes being at (or below) their intrinsic value – then holding on for the long term.
Times like these show why the adage "don’t put all your eggs in one basket" is so vital for us in managing global portfolios. Diversified portfolios tend to be better positioned to weather volatility across regions, sectors and currencies as investor sentiment ebbs and flows. This said, volatility obviously provides an opportunity for active investment decisions as a response to changing valuations or the investment environment.
We have seen this in our exposure to Latin America recently via the Brown Advisory Latin American Fund (previous named Findlay Park Latin American). The Fund has had a difficult first half of the year – largely due to exposure to education stocks, but also a number of economic and political headwinds. Despite this, we are confident in the long-term outlook for increased consumption from Latin America and this pullback in valuation provided us with an excellent opportunity to invest cheaply into great companies within the region. It is important to note that whilst Latin American valuations are looking more attractive, this Fund is likely to continue to exhibit sharp spikes and falls in price; we remain mindful that it should only be an appropriate proportion of the portfolio. The better recent emerging-market equity performance cannot banish investors’ memories of the more difficult periods (2011-2015). In the medium-risk Balanced Strategy, the Fund is at a 4% weighting.
We have made some small changes to the Strategy over the quarter. You will have heard us say before that not all balanced strategies are created equally and the same can be said when searching for suitable defensive assets given the current environment. One of our most expensive bond holdings is the Smith and Williamson Short-Dated Corporate Bond Fund and there is a good reason for this: it owns short-dated (liquid – a key defensive quality) corporate bonds. The problem we have with this sector is that these assets are trading at stretched valuations and are now offering reduced total return (and thus protection) should markets fall – and even less should markets stay the same; accordingly, we have halved the position to 5%.
Another fund that offers a defensive investment stance is the Schroder Strategic Credit Fund. We like the Fund as it uses a bottom-up approach in order to target bond-specific opportunities and its resultant higher return makes it an attractive addition to the bond allocation. As a result, in May we used the proceeds from the sale of Smith and Williamson to initiate a position in the Schroder Fund.
In terms of performance and despite a negative first quarter, the Strategy has made a recovery into positive territory with a ~1.3% return year to date.
Growth Portfolios: Higher Risk by Mark Harries
Objective: The Growth Portfolio’s objective is to provide long-term capital appreciation by investing predominantly into global equities. A neutral position is a 25% bond/75% equity split and the maximum equity weighting is approximately 85%.
After the weakness experienced in many markets throughout the first quarter of the year, it was good to see something of a rebound over the last three months. Pleasingly, after protecting against the worst of the downside, the Growth Strategy rebounded well in the second quarter and made positive returns in each of the last three months, broadly keeping-up with markets and peers.
We have undertaken a little activity in both the equity and fixed-interest components of the Growth Strategy over the last few months.
Over the year to March 2018, we conducted a full review of our bond positions within the Strategy, which, historically, had been designed to act as a buffer during periods when equities draw down and, which, as a result, were relatively defensive in nature. Whilst we still want the bond portion of the portfolio to behave defensively in times of market turmoil, we considered that some of our holdings could be working harder for us relative to their risk/reward trade-off and valuation. Accordingly, and in April, we decided to sell the entire allocation to Stratton Street’s NFA Global Bond Fund.
The Fund has performed well over the last few years, and although there are some possible scenarios where the Fund may outperform other fixed-income exposure, its return potential has shrunk recently. The risks around emerging market debt have risen and we no longer considered that the potential upside justified the fundamentally expensive nature of the asset class. In addition, whilst the Fund’s quoted yield was moderately attractive at ~4.5%, this was based in US dollars, which, once hedged back to sterling, dropped to a little under 3%. To put this into context, sterling corporate bonds, which carry a lower level of interest-rate risk, are currently yielding ~3.2%, providing further evidence that we were not being sufficiently rewarded for the risk taken.
The proceeds of the sale were used to top-up our sterling bond exposure and introduce a 5% holding in the Rathbone Ethical Bond Fund. We had been researching this Fund for some time as part of the review of our investment-grade bonds. The managers at Rathbone seek to find opportunities to lend to firms, via bond structures, where they see unusual value and tend to find a significant portion of their opportunities in niche areas or smaller bond issues. Their active and bottom-up management approach is unusual in the fixed-interest world and we feel this is useful in a world of expensive bond markets and potentially rising rates.
In May, as part of the Strategy to make the portfolio more growth-centric, we introduced a new holding into the thematic allocation, the Pictet Environmental Opportunities Fund, and sold the Fidelity Global Dividend Fund from our global equity-income allocation.
Pictet slots into the "future consumer" allocation within the thematic space, which already includes the likes of Ashmore Emerging Markets Frontier Equity and RobecoSAM Smart Materials. Pictet has a unique start to its investment process by first looking at the impact companies have on the world and then investing in those that have solutions to minimize those impacts. The Fund focuses on sustainability and the scarcity of resources, investing into companies that are active throughout the environmental value chain – all this is discussed in more detail in this quarter’s Fund in Focus. Environmental issues are now a matter of global importance. Companies that provide effective products and services to increase resource efficiency and minimise pollution are well placed to grow strongly. By investing in these firms, investors can make a positive contribution towards a more sustainable world, as well as generating attractive capital gains.
After initiating a small position in the Ashmore Frontier Markets Fund last year, we saw, in the early part of the second quarter, weakness in the Argentinian market negatively impact its performance. Ashmore has approximately 19% of its holdings exposed to this market, which they see as having very exciting long-term prospects. We saw this as an excellent opportunity to increase our exposure to a neutral 5% weighting.
Our growth portfolios continue to be positioned relatively defensively as we enter the third quarter of 2018 and we retain a slightly underweight neutral position in equities.
Global Blue Chip Portfolios: Higher Risk by Holly Warburton
Objective: The Global Blue Chip portfolio invests into approximately 25-30 global blue chips that are in line with our long-term investment themes. The aim is to invest into such companies at an attractive valuation and hold them for the long term. The cash generated can be reinvested to provide capital growth or taken as an income stream.
After a challenging Q1 equity markets have rebounded; recovering the losses of the first quarter and heading into positive territory. The Strategy followed suit and was up close to 8%. Aside from a strong rally within the Energy sector, Technology continued to be the standout; this was reflected in the Strategy via holdings in Apple and Microsoft. In addition, the performance of a number of our Consumer Staples have picked up with the likes of Diageo and L’Oréal sitting alongside the top performers.
With regards to portfolio changes, throughout the previous quarter we have discussed fine-tuning the exposure to Consumer Staples in light of a number of headwinds the sector is facing: changing consumption trends, increasing competition and commodity inflation. In line with this, in April, we introduced a holding that we had monitored for some time – Nike.
Nike is a global leader in sports apparel with unparalleled brand power, high margins and a strong balance sheet. The business is focused on product innovation as it continually strives to provide its customers with shoes and clothing that assist performance offering a tangible and psychological edge. As such, Nike is far more than a fashion brand, enabling it to develop relationships with its customers on a deeper level than its fashion-orientated peers. Nike is utilising the latest technological developments to enhance its direct-to-customer initiative that aims to service customers with targeted products and relevant news flow. When combined with the natural tailwind provided by the increasing desire to live a healthy lifestyle and rising wealth within emerging markets, Nike is well aligned with a number of long-term investment themes and has significant scope to continue to grow and deliver shareholders with good returns.
In addition, we have also introduced a consumer-focused technology company – Visa. The Company operates the largest global payments network and handles almost double the nominal volumes and number of transactions than its next biggest rival. As you will be aware, part of our investment process involves investing in line with a number of irrefutable trends which are designed to act as tailwinds over the longer term. In this regard, Visa is a way of accessing the trend in rising wealth and consumption which we expect to result in rising volumes across Visa’s payment network.
This is a trend that is particularly prevalent within developing markets and Visa has a fantastic opportunity to take market-share away from cash and cheque in many of these developing countries (with a particular emphasis on India). The latest data estimated that, globally, 17 trillion dollars’ worth of annual payments are still made by cash or cheque, so there is significant scope for the electronic payment adoption trend to continue. In any network acceptance is key – and Visa’s scale and brand recognition positions it well to become a benefactor from this expanding trend.
Visa is, first and foremost, a technology company and it is investing heavily in payments innovation as the payment industry looks to adopt to digital payment technologies. Whilst, disruption and regulatory change are credible threats, Visa’s scale and proven ability to deal with regulatory change and partner with potential competitors should be viewed as strength. We view Visa as fairly valued at present, so its weighting is towards the lower end of our range, although we expect it to continue to deliver shareholder value over the medium to long term.
The new additions extol the characteristics of quality that would be typically displayed by Consumer Staples holdings; but with a strong track record of innovation and technological change, these companies have an additional bias towards growth.
Theme in Focus: Environmental Investing
by Mark Harries
Amongst the headlines about the global markets, you cannot fail to notice the supposed Doomsday scenarios being painted for the world’s equity and bond markets. And yet there are some really interesting opportunities if you look at the world around you and what is happening not only today, but for decades to come.
One such growing long-term trend is our increased focus on the planet and encompassing environmental issues. This is no longer simply an issue for the hippies amongst us, but a mainstream concern, which therefore justifies some analysis.
Just think that in October 2011, one of Manila’s public hospitals saw the birth of a baby girl which brought the world’s population to seven billion people. A time of celebration for her family, of course, but a reminder of the challenges posed by ever more people competing for the world’s finite resources.
In less than 30 years’ time, the planet will be home to about nine billion human beings, which is certain to put even more pressure on the environment; testing it to breaking point.
And, as people and investors, we recognise that we now have a crucial role to play in placing the economy on a more sustainable footing. That said, investors face a bit of a paradox – can they become responsible guardians of the environment and simultaneously secure an attractive return on their investments?
With governments and businesses responding to growing public pressure to reverse ecological degradation, a distinct and attractive group of environmental equity investments has emerged. These are companies that combine strong environmental credentials with innovative products and services designed to safeguard the world’s natural resources.
Once a niche activity, environmental investing is now moving firmly into the mainstream. There are several reasons for that.
To begin with, society’s attitude towards protecting the planet has changed considerably in recent years. That’s partly because a growing proportion of the population has personal experience of the damage ecological degradation can cause. In 2015, pollution killed nine million people – three times more than AIDS, tuberculosis and malaria combined. Floods and droughts have also brought untold misery to millions more. Social media has also helped shape world opinion as the issues impacting countries around the world can be shared and re-shared millions of times. Thanks to platforms such as Twitter and Facebook, people can now also voice their concerns about pollution and sustainability in a way they couldn’t before.
People power has, in turn, brought about a change in government priorities. China is a striking example of this trend. In response to growing social discontent, China’s leadership unveiled a ground-breaking action plan in 2013 to tackle its "Airpocalypse" industrial pollution with investments worth hundreds of billions of dollars and a slew of regulations.
China’s investment in the environment has in fact risen six-fold since the early 2000s. And Beijing has promised to invest even more heavily in advanced environmental science and technology. Also giving sustainable investing a shot in the arm is a sharp drop in the cost of technologies such as renewable energy, water recycling and agri-tech. In the US, wind power is now cheaper than any other form of energy, having seen a 40 per cent drop in production costs over the past decade. The costs of producing utility-scale solar power have declined by more than 60 per cent over the same period.
Stars aligned for the environmental industry
The combination of people power, government policies and economics has given rise to a thriving – and eminently investable – industry for environmental products and services. China’s generously-funded anti-pollution drive, for example, is likely to boost the prospects of firms that develop environmental technologies such as filters for engines and industrial applications for pollution control.
More broadly, as corporations worldwide embrace sustainable business practices, publicly-listed firms specialising in the development of a broad range of environmental technologies have mushroomed, whilst the number of patents filed for environmental products over the past decade has more than tripled.
It is estimated that the environmental products industry is already worth some $2 Trillion and can continue to grow healthily for many years to come. More importantly, it is anticipated that companies operating in this sector should see sales growth outpacing that of firms in the MSCI World equity index.
Fund in Focus: Pushing the Boundaries of Investing
by Samantha Dovey
In this quarter’s Fund in Focus, I would like to introduce you to Pictet’s Global Environmental Opportunities Fund (GEO); a new investment in our growth portfolios.
Everywhere you look nowadays; there seem to be people writing about "green", "ethical" or "environmental" investing. This normally brings sighs from our Investment Committee because being "green" has historically given way to lower returns – and nobody wants that! This led us to wonder: does the holy grail of being kind to the earth while providing solid returns exist? In short, we believe so, and have chosen to gain exposure via Pictet GEO, managed by Luciano Diana.
Pictet is well known for thematic investing, which is one of the reasons why we decided to take a closer look at its offering in this area. The strapline states that "they know everything about little, and aspire to be experts in the themes in which they invest." We like this as an investment mantra, as it hones their expertise and portfolios.
I have been researching funds and investment processes for longer than I care to remember. Given that I am closer to 50 than 40, although I started late in this career, I have still managed to notch up more than 20 years. The one thing I can say about this Fund is that it has a unique starting point to its investment process. The managers assess the impact of companies’ operations on the Earth’s planetary boundaries. This may all sound a little "hippy", but it really is fascinating when you start to look in-depth.
The Starting Point – Planetary Boundaries
For those of you that are interested in the scientific framework, the planetary boundaries paper was first published by Johan Rockstrom in 2009. It essentially looks at the limits in which humanity can safely extract resources from the Earth (which cannot be eliminated by wishful thinking or denial). Everyday activities on the whole negatively impact the Earth, whether it is via the water cycle, climate change, biodiversity, ozone depletion or land use.
Pictet screens potential investments via planetary boundaries, this allows managers to understand how a company’s products and services, taken over their entire life cycle, impact the environmental dimensions. What the initial analysis aims to uncover are those companies that affect the boundaries least, or most importantly those companies that have solutions to reduce the impact on the boundaries. Researchers can therefore understand whether the company’s business model will be hindered or favoured by stricter environmental constraints in the future.
Why will these companies outperform?
The belief is that the environmental value chain is likely to offer attractive and sustainable investment opportunities for decades to come.
Environmental issues are now a matter of global importance; accordingly, within the planetary boundaries there is less risk of litigation and hence minimal impact on a company’s bottom line and profitability. Companies that provide effective products and services that increase resource efficiency and minimise pollution are also well placed to grow strongly as Government policy may also come into play – just think about the phasing out of petrol and diesel vehicles in favour of electric or hybrid ones, as we try to "save the planet." By investing in these firms, investors can make a positive contribution towards a more sustainable world, as well as generating attractive capital gains.
A real life example
The Company: Ansys – Ansys has a software system that is the leader in mechanical and fluid dynamics, which is used in electronics, aerospace and manufacturing industries. It produces a digital twin to replicate physical characteristics. One of Ansys’s customers is a vacuum company: this customer’s first product took 5,000 physical prototypes, but nowadays no physical prototypes are produced since they are all simulated.
From a planetary boundary point of view, the CO2 footprint is better, water footprint is smaller and the chemical pollution is less and they can use better materials. From a biodiversity point of view, the customer is not extracting materials that would have otherwise been used and discarded.
Has it performed?
The simplest way to assess this is to look at the returns. The Fund launched at the end of September 2014 and has since returned over 72% (as at close of business on 22nd June 2018) in GBP terms, versus the MSCI World Index of 67%; the average of other "green/ethical" funds in the sector have returned 50% over the same period. So, yes, as it stands, the Fund has not followed the general "green" path of underperformance, but, instead, delivered good returns whilst doing its bit for planet!
Stocks in Focus:
by Ben Byrom
Your quarter’s mash-up of Blue Chip’s movers and shakers…
Struggling staples giant Procter & Gamble clearly likes the trends in over-the-counter consumer healthcare markets since it agreed to buy Merck’s consumer health division for €3.4Bn in April. It is the first deal done since activist investor Nelson Peltz gained a board seat in March. Peltz, who engaged in a lengthy proxy fight for his seat, has accused P&G of being slow to react to threats and opportunities. The deal looks a bit on the rich side, but offers P&G good access to fast-growing markets such as Latin America, as well as a faster-growing product portfolio.
Consumer health and personal care products thrive under a strong brand name and few come bigger than Healthcare giant Johnson & Johnson and toothpaste and personal care titan Colgate-Palmolive. Both, however, are fighting multiple lawsuits over accusations that their talcum powder products contained carcinogenic ingredients in the 1990s. Talc is the main ingredient in Talcum powder and can be found in areas where asbestos is also present. Failure to refine the mineral properly could lead to asbestos finding its way into the end product. The link between Talcum powder use and cancer is mixed but US courtrooms are beginning to agree with plaintiffs’ accusations that the companies failed to disclose the risks appropriately. Insurance policies should cover most of the associated costs and fines, the knock to brand equity may be less quantifiable – either way, we can guarantee juicy headlines when future verdicts are reached which may impact share prices. As long-term holders, we’d top-up should valuations justify.
When it comes to headlines, few are bigger in the M&A corporate world at the moment than those being inked by The Walt Disney Company as it battles Comcast to buy 21st Century Fox’s entertainment assets. The Department of Justice’s failed attempt to block the vertical merger between AT&T and Time Warner earlier in June paved the way for Comcast to gate-crash Disney’s party with a superior, all cash, offer that valued Fox at $65Bn. Disney responded with a half-cash, half-stock offer worth $71Bn - a 19% increase on its original offer. The deal has also received regulatory approval from the Department of Justice, subject to a minor concession. Comcast is assessing its options but is unlikely to do it alone as any increased bid would send its leverage ratio into sub-investment grade territory – a place where the owner/operator Roberts family do not wish to go. The House of Mouse is once again in the driving seat with the highest bid on the table and regulatory approval in the hand. For Fox’s board to want to endorse another offer the number would have to be compelling..!
Dealmakers will endure many late nights to make sure the deal gets done. No doubt caffeine plays a huge role in their daily diets. That should be good news for Nestlé who signed their own deal containing the rights to market and sell Starbucks’ consumer packaged coffee brands. The deal looks to compliment both companies. Starbucks will sell the rights to Nestle for $7.15Bn and receive royalties on sales going forward. Starbucks will likely benefit from Nestlé’s extensive global network, acting as a brand ambassador for its stores, helping drive traffic and store expansion (an area it can now focus resources on after licensing-off its CPG business). Nestlé will look to leverage off its extensive distribution network and grow the $2bn in revenue the CPG unit generated under Starbucks’ stewardship. The alliance is expected to be earnings accretive from 2019 onwards and help consolidate Nestlé’s No. 1 position in coffee. The deal looks a successful brew!
From coffee to Coffee Lake, which is our last tenuous link but guides us nicely to Intel – which is struggling to develop chips thinner than Coffee Lake’s 14 nanometres; resulting in the Company ceding its technological lead to rivals Samsung and TSMC. Intel’s CEO Brian Kraznich unexpectedly announced his resignation on 22nd June with immediate effect – the reason given was due to a breach of the Company’s non-fraternization policy. On the face of it, this seems an over-the-top outcome for a breach of policy Intel doesn’t exactly enforce rigidly – allegedly, there are numerous ‘in-house’ relationships whilst Otellini, Kraznich’s predecessor, is rumoured to have had several. So what are the real motives? As mentioned above, we suspect the ceding of its technological leadership under his stewardship may well be the underlying current. Adding intrigue are Kraznich’s actions earlier in the year, when he dumped the majority of his holding in the Company. The reduction of Kraznich’s ‘skin-in-the-game’ was not enough to undermine our investment rationale: positive earnings guidance in lieu of its upcoming Q2 announcement in July continues to evidence the good progress being made with its transition from a PC-centric business to a "data-first" powerhouse. However, Intel’s ceding of its technological edge is a red flag and we will continue to monitor the Company.
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