How a global equity manager finds value in an expensive market

Our Investment Committee met earlier this week with Luxembourg-based global equity managers, Klaus Petersen and Jens Hansen who run the ValueInvest Global Strategy, which makes up approximately 30% of our Newport Global Equity Fund.

Here are some highlights from our discussion – and some good reminders for investors who seek to preserve capital.

The team’s investment approach is bottom-up and value oriented – meaning they look for market inefficiencies to buy high-quality companies at a discount to their intrinsic value. They are constantly balancing valuation and quality in the portfolio – and have shown the discipline not to sacrifice one for the other.

Petersen and Hansen are concerned about the level of risk in markets today. They point to historically high valuations, slowing economic growth and the damaging effect of trade tariffs. They spend a lot of time “stress-testing” their portfolio and feel comfortable they have assembled a cadre of companies that can sustain and even grow their earnings in bad times.

Currently, 50% of the portfolio is in a group of consumer staples businesses, which they described as a “proxy for bonds.” At the height of the financial crisis in 2008, consumer staples represented 60% of their portfolio.

A couple of examples of their contrarian thinking:

• Nestle is one of the largest holdings in the portfolio and a top performer year-to-date. “Some people think of it as a boring name,” explained Hansen. “But it is actually a collection of highly-innovative businesses and products. It outspends rivals on R&D and is very responsive to changing consumer trends and tastes, such as the move to meatless burger products, for example. It’s also a way to participate in the growth of Emerging Markets without direct investment.”
• Another top performer that offers proof you can profit from owning a good business in a tough industry is Next, a British retailer. “Owning retail and especially a British retailer amidst the uncertainty of Brexit would not be at the top of many people’s list,” said Petersen. “But Next is a very well-managed business that has gotten the mix of online and bricks-and-mortar (retailing) right. They’ve also been very transparent about the Brexit risk to their corporate performance, and the market seems to be missing this. The stock has been volatile, and we have traded it to our advantage.”

Valuations have prevented them from investing in the tech sector currently – although this could change as market sentiment around tech changes. We have already seen signs of this in the past 12 months. They’ve identified cyber-security as a theme they are following closely.

They also provided a reminder that it pays to be patient when you have conviction around the value of a business. One of their top-performing holdings this year is General Mills, which was off significantly last year. They kept buying it when the stock price was under pressure and this year it has rebounded nicely.

All of this sounds deceptively simple, but Petersen and Hansen and their team have shown that sticking to your knitting takes discipline and not following the crowd can be key to long-term success.

If you have any questions or would like to talk about your portfolio’s positioning, please feel free to get in touch anytime.