Our best approach to generating outsized returns in equity markets is to identify individual winners on a bottom-up basis. Big winners drive overall returns to an extent that is generally underappreciated. For example, recent research by Hendrik Bessembinder has shown that 4% of companies have accounted for 100% of U.S. equity market wealth creation since 1926.
Seeking winners also makes intuitive sense given certain features of today’s corporate landscape, across which we observe increasing winner-takes-all dynamics, evidenced by profitability and returns on capital at top firms staying higher for longer, increased corporate concentration, and the ability of cash-rich incumbents to purchase upstart challengers.
For us, the ideal business is one where we can say with a high degree of certainty that in several years’ time, it will be generating substantially more free cash than it is now while being overseen by a management team that will allocate that capital prudently.
Below, I share the top 10 holdings which easily meet and exceed these hurdles within the Intermede Global Equities Fund. Of course, once we find companies that tick these boxes, we consider many more factors including valuations, ESG, and quality of management, but it shows how investors can use a well-defined screen to boil their investment universe down into a manageable list of quality companies.
#1 - Charles Schwab Corporation
With client assets of over US$6tn following the recent value-accretive acquisition of TD Ameritrade, Schwab is the leading publicly traded retail investment services firm in the US, an industry which exhibits high structural growth prospects and where Schwab is best positioned to benefit, providing clients access to a wide variety of investment opportunities at low cost with high-quality service.
With competitive advantages gained through scale and structurally lower operating costs and a strong management team executing a clear, long-term client-centric strategy, we expect the group to continue to take market share resulting in strong growth in revenues and earnings.
#2 - Samsung Electronics Company
Samsung Electronics is a major manufacturer of electronic components including memory semiconductors and lithium-ion batteries, and is also the world’s largest manufacturer of mobile phones and smartphones.
We are attracted by Samsung’s ability to capitalise on its leading edge technology to maximise profitability in its component business, while also fuelling innovation and differentiation in its device business. Samsung’s management team is increasingly committed to returning value to shareholders through dividends and share repurchases.
#3 - Alphabet
Alphabet is the parent company of Google, the internet media giant. Google remains a true cornerstone of global internet usage on mobile devices and desktops, which fuels its dominant presence in online advertising through the core search business plus video based ads on YouTube.
#4 - Nestlé
Measured by revenues, Nestlé is the largest food and beverage company in the world. Nestlé brands enjoy dominant positions in categories including Beverages (Nescafé, Nestea), Confectionary (KitKat), Petcare (Purina) and Water (Vittel, Perrier). Nestle’s history of consistently stable and profitable growth has been reflected in half a century of steady dividend growth.
Long-term shareholders have also benefitted from a consistent buyback program that has seen Nestlé’s share count reduced by approximately 20% in the last decade. Nestlé’s future growth is supported by the substantial portion of overall sales (42% in 2019) generated in faster-growing emerging markets.
#5 - Linde
Linde plc is a leading industrial gases and engineering company, formed in a merger in 2018 between Praxair and Linde AG. Linde is the largest participant globally in a market that features only two other global players. We believe Linde has a significant opportunity to improve operating margins following the merger with Praxair through cost synergies and operating gains.
#6 - Danaher Corporation
Danaher is a leading supplier of tools, services and consumables used in clinical diagnostics, life science research and biological manufacturing. Danaher Business System, a proprietary, efficiency-focused management tool kit, is employed across Danaher’s business units and has helped the company to deliver almost unbroken revenue growth and margin expansion for over 35 years.
#7 - CME Group
CME is a leading global derivatives exchange with near monopoly positions in many diverse, globally relevant products as a result of its integrated trading and clearing platform. This results in strong pricing power which together with secular volume drivers, such as trading electronification and futurisation of derivatives, supports high revenue growth prospects.
CME benefits from strong operating leverage, cost discipline and cash conversion which is fully distributed to shareholders through quarterly fixed and annual variable dividends.
#8 - Taiwan Semiconductor Manufacturing Co
TSMC is a leading semiconductor foundry globally with >50% market share and long track record of success. TSMC stands out as the only purely independent manufacturing partner at the leading edge of semiconductor technology.
We expect that position to strengthen further over time, as advances in technology become more difficult and expensive for competitors to match. And while capex intensity for the industry is high, management have proven to be excellent stewards of shareholder capital, producing high free cash flow yields with attractive returns on invested capital and a growing dividend.
#9 - S&P Global
S&P is a leading global credit ratings agency, and therefore operates in an oligopolistic industry with high barriers to entry leading to strong pricing power and high margins with growth supported by structural trends such as bank disintermediation.
S&P is also a leading equity index provider (flagship indices include the S&P 500 and the Dow Jones Industrial Average) benefitting from strong growth in passive investment strategies with a highly scalable model resulting in very high operating margins.
S&P further owns one of the best commodities price reporting agency (Platts) and desktop financial information services products (such as Capital IQ and SNL), all of which benefit from strong growth, a high degree of recurring revenues and strong pricing power and margins.
#10 - Housing Development Finance Corporation
HDFC is a leading mortgage provider in India, a market with attractive long-term growth prospects driven by low mortgage penetration, attractive demographics and social trends, and supported by a robust economy.
Industry growth prospects are further bolstered by Government measures introduced to tackle housing shortages and promote home ownership in India. HDFC is best positioned to benefit from these trends with significant competitive advantages gained through its unique business model, distribution capabilities and brand.
The group further benefits from ownership stakes in leading providers of banking, insurance and asset management services in India.
We apply laser-like focus to just one thing – high quality global companies that we expect to consistently deliver double digit percentage earnings growth, year in, year out.
For more information on the Intermede Global Equities Fund, please visit mlcam.com.au/intermede, speak to your financial advisers or contact us on 1300 738 355.
This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (‘ACP’), responsible entity of the Intermede Global Equities Fund (ARSN 602 927 739, APIR code PPL0036AU, ASX mFund code INT01) (‘Fund’). ACP has appointed Intermede Investment Partners Limited (‘Intermede’) as investment manager of the Fund. Before making any decision about investment in the Fund, you should consider the product disclosure statement (‘PDS’) of the Fund available from mlcam.com.au/igef or by calling 1300 738 355. ACP is part of the IOOF group of companies (comprising IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate) (‘IOOF Group’). Any references to “we” include members of the IOOF Group and any officer, employee, agent, adviser or contractor. An investment in any such financial product referred to in this communication is subject to investment risk, including possible delays in repayment of capital and loss of income and principal invested. The information in this communication is general in nature. It has been prepared without taking account of any individual investor’s objectives, financial situation or needs and because of that investors should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs. Some information in this communication has been provided to us by Intermede, It comprises their opinion and judgment at the time of issue and are subject to change. We believe that the information herein is correct and reasonably held at the time of compilation. Neither ACP nor any member of the IOOF Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this publication. Any projection or other forward looking statement in this publication is provided for information purposes only. Though reasonably formed, no representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.