A conversation with Davis Advisors
Peter Sackmann CFA, analyst and portfolio review committee member at Davis Advisors (Davis), recently shared some insights with the Pan-Tribal team. Peter discussed markets, sectors and stocks in relation to the Pan-Tribal Global Equity Fund’s portfolio.
The strategy that underpins the Fund is a fundamentals-based, unconstrained approach, with bottom-up research conducted in-house. The portfolio holdings represent high conviction ideas from a universe of global investment opportunities.
Markets & sectors
In this low-interest rate environment, valuations in certain sectors are particularly high, with investors paying a significant premium for dividends. Some businesses are trading at very high multiples, largely because of investors’ willingness to pay a premium for an income stream. The patient, long-term investment discipline employed by Davis, coupled with its bottom-up stock selection approach, ensures that the focus remains on the underlying quality of a company’s balance sheet.
The Fund currently has little exposure to consumer staples; at 30 June 2016, the Fund had just 1.1% in this sector, versus a benchmark* weight of 11%. Davis believes there is little opportunity to find attractive businesses in a sector that is arguably overvalued worldwide, despite growth being challenged in the current environment.
Similarly, healthcare (1.3% versus 12.2%) is a sector where high valuations have resulted from the market’s preparedness to pay a premium for dividends and the Fund currently has little exposure. Davis views healthcare as a long-term secular trend and, as a result, the team pays careful consideration to investment opportunities that are well positioned to capitalise from such a trend.
On the other hand, financials are well represented (19.3% versus 19.7%) in the portfolio at present. Davis considers this sector to offer some attractive opportunities at the moment with expectations for solid total returns through a combination of return of capital (i.e., dividends and share buybacks) as well as modest top-line growth over the next five years. Furthermore financials should be beneficiaries if interest rates normalise somewhat, all else being equal.
Davis holds the view that oil prices in the US$40-$50 per barrel range are not sufficient to support meaningful investment in new projects to supply the approximately 96 million barrels per day of demand since most oil producing companies – and countries – require much higher prices to make such projects economically viable. Consequently, Davis expects that at some point in the intermediate term energy prices should rebound somewhat, even if they do not return to the peak we saw in 2008 when oil approached US$150 per barrel. The current energy holdings in the portfolio reflect companies that Davis believes to be better positioned than peers given their lost cost operations and long-lived reserves.
The Fund now invests in several businesses in the aerospace industry, including United Technologies, Safran, Wesco Aircraft and InterGlobe Aviation. With the expanding middle class across the globe, a larger number of people have access to air travel, suggesting stocks such as InterGlobe Aviation (a low cost carrier in India) will be well positioned going forward. Likewise, service and manufacturing providers should be well positioned as even if a country’s economy is sluggish, air carriers are hesitant to cancel orders for new fleet because it can be years before they’re back in the queue given the significant order to delivery lag time.
Emerging sectors, particularly disruptive businesses, are being watched with interest. Many of the Fund’s information technology holdings, particularly in China (e.g. YY.com, Baidu) have the potential to benefit from technology adoption in developing markets.
Amazon was the Fund’s top holding at 30 June 2016; it continues to be a major disruptor to a number of businesses around the world. In its most recent results, Amazon had grown its market share and revenue globally, with sales up 26% year-on-year at the end of the second quarter 2016.
The Fund has a slightly larger weighting to the US than previously. Although geographic positioning is the result of underlying stock decisions, the current multiples in many European businesses do not seem well-justified given anemic growth expectations. The Davis team will continue to maintain a watching brief on investment opportunities.
Although there is negative sentiment around China and its economy, the burgeoning middle class and growing consumption will continue to support the emergence and growth of a number of interesting businesses.
Danton Goei, the Fund’s Portfolio Manager, is currently in China (where he spends every alternate summer) visiting a number of established and newer businesses. We’ll publish his insights in the near future and plan to have a China-themed conference call with him. If you’d like to participate, please contact your key account manager.
*MSCI All Country World Index ($A)
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