Globally focused quality companies with predictable earnings, and strong balance sheets and cash-flows dominate the portfolios run by head of global equities Hugh Young (pictured) and his team.Finding attractively priced stocks is of course a priority, but the emphasis on quality is even more important.
Eliminating downside risk is at the forefront of Aberdeen’s clearly defined process, which sees its funds more often than not outperform during falling markets, with 2008 a standout year for the group.
Its funds do tend to lag behind their peers in fast-rising markets, though over the long-term the process has worked for the overwhelming majority of them.
The strong performance of equity markets – with the exception of emerging markets – has pushed valuations higher over the past two years or so.
There are particular concerns from some quarters over quality defensive companies that fit with Aberdeen’s clearly defined process, which had a stellar run even before equities rebounded in the aftermath of the eurozone crisis.
However, Aberdeen insists that it is still possible to find cheap stocks that pass its various quality screens.
Here are some examples from different regional teams at the group.
Hugh Young, manager of Aberdeen New Dawn Investment Trust
The Asian equity expert is one of the founders of Aberdeen’s process, which has helped him build a reputation as one of the best emerging market investors on the planet.
He points to Giordano – a Hong Kong-based retailer of casualwear – as an example of an attractively priced quality company.
“We have owned it for many years,” he said.
“It is sort of an Asian version of GAP, which operates a business model that’s easy to understand, boasts a strong balance sheet, is highly profitable and pays a dividend that offers investors a yield of around 7 per cent.”
“The company has expanded beyond Hong Kong into mainland China – where it operates nearly 1,170 stores – across the rest of Asia, into the Middle East and even central Asia.”
“Giordano’s share price has fallen over 30 per cent since a record high set on 15 August 2013, due mainly to weaker sales in China as the nation readjusts to slower growth. However, we think the sell-off is somewhat overdone, as this is a company that is well positioned to weather the short-term volatility that has affected emerging markets.”
The company is currently trading on a price/earnings (P/E) ratio of 11 to 12 times.
“We think there’s still a lot of value here,” he added.
Young’s Aberdeen Asian Smaller Companies IT includes Giordano as a top-10 holding, as does the Templeton BRIC fund.
Ed Beal, manager of Dunedin Smaller Companies IT
Ed Beal (pictured) has been the manager of the £113m Dunedin Smaller Companies IT since February 2005.
The trust is one of the best performing UK small cap trusts over the period, with returns exceeding 255.02 per cent – almost three times as much as its FTSE Small Cap (ex IT) benchmark.Beal points to FTSE 250 polymer producer Victrex as a cheap quality company he owns.
“It is a global leader in the production of a polymer called PEEK,” he explained.
“PEEK has chemical, heat, weight and wear advantages over many metals and plastics.”
“These characteristics mean that it is increasingly used in high-value applications. Victrex benefits from production know-how, meaning that it remains the only operator capable of producing meaningful commercial volumes of high-grade PEEK.”
“Given that the product is typically used in small amounts but in critical situations, there is a very low incentive for customers to consider any alternative sourcing should it become available.”
Victrex has made solid gains in recent years, returning 56.18 per cent over a three-year period.
It has had a particularly good start to 2014, as the graph below shows.
However, Beal says the demand for its skill-set and its attractive valuation – particularly from a dividend point of view – means it is still a “buy” for Aberdeen.
Performance of stock vs index over 3yrs
Source: FE Analytics
He added: “The business has an established track record of investing in capacity well ahead of the demand curve, hence securing control of its supply chain and giving customers the confidence to develop products that will require PEEK in the future.”
“The company trades on 18.4 times expected earnings, has a net cash balance sheet and grew its final dividend by 15 per cent.”
Victrex is a top-10 holding in the Montanaro UK Smaller Companies IT.
Six open-ended funds count it as a major holding, including Baillie Gifford British Smaller Companies and FE Alpha Manager Andy Brough’s Schroder UK Mid 250 fund.
Charles Luke, manager of Murray Income Trust
Charles Luke has led the £524m Murray Income Trust to outperformance versus its FTSE All Share benchmark over one, three, five and 10 years.
It is currently yielding just over 3 per cent.
He highlights UK pharmaceuticals giant AstraZeneca as a high-conviction position in his fund.
“The attractions of AstraZeneca’s pipeline are gradually becoming better known but the full earnings potential is still not widely appreciated by the market,” he explained.
“The perceived wisdom has been that the company will struggle to replace its products that have already lost their exclusivity or that will do so over the next couple of years.”
“However, the company has a remarkable opportunity through a number of existing products such as Brilinta and its diabetes franchise, together with a very exciting immunotherapy portfolio, to reposition itself for much faster growth, which will likely result in a substantial re-rating.”
Luke says investors will have to be patient for this capital growth potential to come through, but points out that the company is also very attractive from an income point of view as well.
“In the meantime the company pays an attractive dividend which looks safe, in part because it is linked to management incentives,” he explained.
“The company also benefits from a strong balance sheet and we believe that Pascal Soriot is an experienced and insightful chief executive to lead the company forward.”
AstraZeneca is one of the most held UK stocks in the IMA universe.
Among its biggest admirers are FE Alpha Manager Neil Woodford, who includes it as his biggest holding in his Invesco Perpetual Income and High Income funds.
Performance of stock and index over 10yrs
Source: FE Analytics
The FTSE 100 giant has had a very good time of late, having significantly lagged behind the index in the last decade.
It is currently yielding 4.7 per cent and is on a P/E of 16 times.
Max Wolman, manager of Aberdeen Latin American Income
Wolman has co-run the income-focused Latin American portfolio since August 2010.
Like all managers in this region, Wolman has endured a difficult time, though his fund’s significant exposure to fixed interest has helped it hold up better than the MSCI EM Latin America index.
When looking for cheap quality, he points to the battered Brazilian government debt market.
“In Brazil, we see value in local rates, which offer some of the highest nominal and real rates in local markets,” he said.
“The positive effect of the removal of the 6 per cent IOF tax on BRL-denominated bonds back in June 2013 was tempered amid concerns about the government’s deteriorating fiscal position and the risk of a sovereign rating downgrade.”
“On top of this, it is an election year, with presidential and parliamentary polls due to take place at the beginning of October, so political risk remains in the headlines.”
“However, we believe that many of the market concerns are now already reflected in the price – local 10-year government bonds are yielding 13 per cent, making a real yield including inflation of 7 per cent.”
“Moreover, consensus expectations for 2014 growth continue to fall, which should also be beneficial for local market returns over the medium-term.”
Aberdeen Latin American Income IT has a 14.4 per cent position in a Brazilian government debt issue, making it its single biggest position.
The fund is currently yielding just over 4.5 per cent.
