Nurturing growth and value
Greg Aldridge, fund manager of the M&G Global Growth Fund, answers some frequently asked questions on the minds of many advisers.
What is distinctive about your approach to growth?
Our concept of growth is quite different to the ‘traditional’ one that conjures up ideas of ‘expensive’ companies, or of very rapid earnings or sales growth generating bursts of share price performance.
We focus instead on companies that can grow the fundamental value of their businesses over the long term.
These companies must be able to ‘create value’ by generating high returns on the investments they make, and reinvesting the resulting cashflows at similarly high rates of return in order to expand the business.
It is only by investing in assets that through time are worth more than the original investment that companies can create the wealth that makes them more valuable over the long term.
Also, there need to be good reasons why businesses can continue to generate these high returns.
Sustaining high returns requires something special that a firm’s rivals cannot copy.
That is what we refer to as ‘scarce assets’ – the physical, intangible and organisational resources that some companies possess and that cannot be replicated and competed away.
How do you approach valuation?
Generally, returns are expected to fade over time as competitors erode a company’s advantages, but I am trying to find companies that have the scarce assets that should enable them to deliver sustainable returns.
I take a three- to five-year view, and, where I believe the market has not appreciated the value of a company’s assets, I will invest.
What regions are you currently favouring?
European company valuations are currently very low compared with other regions as investors are discounting too much bad news since the European sovereign debt crisis.
As a result, I have been finding many high-quality global companies listed in Europe that are particularly good value.
The fund’s exposure to the region is currently 40%, which is overweight against the FTSE World Index*.
What areas of the market excite you at the moment?
While there are some obvious growth drivers in the world, such as emerging markets, there are others that are unrelated to rapid economic expansion in particular countries.
For example, the oil industry provides abundant growth opportunities, not because of increasing demand, but because oil is becoming more difficult to access.
In future, oil will increasingly be sourced from places like offshore Brazil where producers need to drill through thousands of metres of rock and unstable trapped salt, which requires innovative techniques and equipment.
In the US alone, the use of horizontal drilling, which uses over four times as much steel pipe as the traditional vertical method, has increased massively over the past ten years.
For the manufacturers of these high-quality pipes, such as Vallourec, this is a powerful growth driver.
Why is this fund a good proposition for investors now?
Markets have been extremely volatile recently, and, in many cases, shares have been indiscriminately sold off based on a company’s domicile, rather than on where its main operations or markets are, or its potential.
For an active stockpicker, variability in share price returns continues to throw up significant opportunities to invest in a range of high-quality, differentiated companies that can grow the fundamental value of their business over the long term.
We are confident that the fund’s thesis of long-term investing in a broad range of such value-creating businesses across a range of geographies and sectors (both defensive and cyclical) will prove beneficial for long-term investors.