He committed to “clearing out the deadwood” and strengthening the trust with businesses that have firm control over setting their prices, something that will be crucial in this tough market environment.
“When your cost base is expanding and your volumes are fixed in the short term, the only way you can overcome that is through pricing power,” Stotzel explained. “In this environment, that’s going to be more important.
“We’ve been talking about inflation forever, but we haven't seen the impact of companies actually living with it until very recently, so we really doubled down on pricing power.”
Fidelity European remained largely unchanged in recent years, with its annual turnover of 10% since 2020 half the usual rate.
However, as monetary conditions become ever more challenging and companies face higher hurdles, Stotzel decided to do “a year's worth of trading in just the month of January alone”.
“We weren’t sitting on the beach sunning ourselves, but we looked at each crisis unfolding and thought we had a portfolio that was fit for purpose,” he said.
“After three years of this, we ended up with a portfolio that had some stale ideas and wasn't correctly positioned for what we thought was going to come ahead.”
Nevertheless, finding stocks with strong pricing power is easier said than done. Stotzel attempted to find a metric to find these companies, but found that it differs on a case-by-case basis, making the search for strong stocks a lot more labour-intensive. Here he shares the top five stocks offering the strongest pricing power on the market.
Lonza is a Swiss pharmaceuticals company that’s Stotzel added to the trust in his hunt for pricing power at the start of the year. It now accounts for 1.2% of portfolio.
Other healthcare companies outsource their drug development and manufacturing to Lonza, who do it on their behalf.
Although it plays a small role in the overall development process, its work is crucial to the eventual roll-out of new drugs, meaning companies are happy to continue paying Lonza.
Stotzel said: “The cost of what Lonza does versus the eventual sale of the end product is tiny and that's one of the things we really love about it – it’s small but critical.”
He expects healthcare to be one of the best performing sectors over the long term, but said picking individual winners in the space is difficult. However, Lonza is likely to benefit regardless of whomever outperforms in the race to develop new drugs.
“You don’t need to know who is going to invent the next big drug, but you do know that some company is going to do it and their capacity is going to spill over,” Stotzel said.
“They're not going to be able to do it globally all on their own and Lonza is one of the biggest in the world – certainly the biggest in the West – which means it will get their fair share of that.”
Semiconductor manufacturer ASML is another company that could take advantage of overarching themes. The Dutch business sells machines that make computer chips, which are in-ever growing demand.
“One of the structural trends that I would always hang my hat on is chip growth,” Stotzel said. “I can't think of what would have to go wrong in the world that would mean we won’t need substantially more chips in five years’ time than we do today.
“Right at the top of that structural growth is ASML, which is the only company that can deliver that extreme demand.”
Like the healthcare sector, there are an abundance of companies that could benefit from the investment theme, but ASML has a strong foothold in the market that should stand to benefit from increased demand, according to Stotzel.
He said: “The end customer for that leading edge chip is pretty price insensitive and that feeds all the way back up to ASML who have the monopoly on that equipment.”
Share price of ASML and Lonza over the past five years
Source: Google Finance
Another company that Stotzel called “small but critical” was Dutch health and nutrition business, Koninklijke DSM.
It supplies key ingredients for a range of products, which may seem insignificant on first glance, but is an essential component for many companies.
Stotzel said: “The cost of what it does is less than 1% of the bill of materials, but the value that it drives is way more because without the company, the product wouldn't exist.”
The same can be said for German fragrance company Symrise, which plays a pivotal role in the production process for many perfume companies.
Without its services, the fragrances sold by these businesses would cease to exist, which puts Symrise in a strong position to up its prices where necessary, according to Stotzel.
“If you're buying an Armani perfume and it costs you £50, it better smell like it,” he said. “It’s a small part of it, but if that goes away, the whole product falls away, so it’s really critical.”
Share price of Symrise and Koninklijke DSM over the past five years
Source: Google Finance
Alternatively, investors seeking robust pricing power in a slowing economy may want to look to Swedish lock company, Assa Abloy.
The 271bn krona (£20bn) business provides locks and other building access products – something essential to any property owner who wants to keep their premises secure.
Stotzel said: “What percentage of the costs on a building are locks? It’s tiny for sure, but if the locks don't work, it's much more important than if the lights or furniture isn’t working.
“If you've ever lost your keys and get a locksmith to come over, asking how much it costs is probably one of your final questions. It just highlights the importance of locks and access control.”
Share price of Assa Abloy over the past five years
Source; Google Finance
Assa Abloy is one of the bigger players in this congested market and is growing its position with a number of acquisitions around the world, such as the recent purchases of Mottura in Italy and HHI in the US.
“It's a super fragmented market, so its market share globally will be less than 10%, but it's been acquiring some US players and rolling up the market slowly,” Stotzel explained.