Welcome to the Friday Fund Review! Every two weeks we will break down a fund or ETF that we have been following, investing in, and analysing as we strive to provide our clients with the best investment solutions. This week we are taking a look at Ninety One Global Franchise, managed by Clyde Rossouw.
Ninety One Global Franchise is aimed at providing capital growth (i.e. to grow the value of your investment), with opportunity for income over the long-term. The fund is a quality driving fund that is managed by Clyde Rossouw and his team at Ninety One.
Clyde has managed this fund since August of 2011 and is the Co-Head of Quality. He is a big quality investor and he firmly believes that their quality company picks have a strong competitive advantage, dominant market positions, low sensitivity to broad market cycles, strong balance sheets, and lastly effective capital allocation and strong cash generation.
These 5 key characteristics lead to a concentrated portfolio of high quality conviction stocks. Investing in quality means one is investing in fundamentals which essentially means that you are investing based on the primary characteristics and financial data of a business that shows the stability and health of a business. The data often includes macro and micro economic factors and how these can impact the stability of the business within its market.
With a lot of uncertainty facing markets currently and the maintaining of the global economy Inflation is proving to be a significant culprit, remaining far more persistent and elevated than initially anticipated. As a result, there has been little let up to the hawkish rhetoric from central banks as they continue lifting interest rates, with the Federal Reserve announcing a 10th straight increase in May. This had consequences as we saw in the US banking sector and we expect markets to remain choppy in the short term. As the economic outlook comes under increasing pressure, earnings growth will be tested and squeezed. However, where resilient earnings are demonstrated by high quality, global businesses are going to become increasingly important and valuable for investors. Revenues are essentially repeatable because these companies typically offer products and services that people need: ranging from medical device makers to software providers to staple food producers. These defensive characteristics have enabled quality companies to survive multiple economic cycles with their market position and competitive economics intact, while delivering returns to shareholders that have typically been not only stronger than the market, but also relatively defensive and uncorrelated.
Now for those of you reading and asking yourself why would I invest in such a fund that shows relatively tamed performance over the long term? Downside risk protection.
Downside risk protection quality companies offer great downside risk protection when markets sell off. What this means is that when markets are running flat or sleeping off, Ninety One Global Franchise’s investment strategy limits that downside risk of under performance and it is during these periods of poor market performance where Clyde Rossouw and the team achieve their outperformance.
Performance Assessment:
Looking at the fund performances, we have broken it down into rolling twelve month returns and historical annualised performance.
The first chart below depicts what we feel is the most valuable reason for investing in the Ninety One Global Franchise Fund, downside risk! Take a look at the trailing returns from July 2021 to July 2022. When the rest of its peers in its category lost 20%, Clyde Rossouw and the team only lost 12,5%. Whilst it did not beat its benchmark, the MSCI AC World Net Return Index (which covers nearly 85% of the worlds investible global equity stocks), it has still managed to produce out performance, especially when looking at the long term.
Source: Ninety One
Now looking at the second chart below, we can see that Clyde and his team have consistently outperformed against peers over the long term, whilst managing to keep up with it’s benchmark.
Considering that the fund only holds 27 holdings, it is quite remarkable to see how well this strategy has paid off!
Source: Ninety One
Outlook going forward:
A Global recession still looms over the market as we approach the latter part of 2023 with inflation remaining sticky. The FED has paused rate hikes, but they have signalled future, smaller increases to fight inflation. What this means is that a company’s ability to adjust prices and achieve a reasonable initial valuation are vital defences against inflation. As the rate environment gradually stabilises, investors will shift focus to business fundamentals. Historically, quality companies tend to perform better after an interest rate hike cycle ends. In uncertain economic conditions, whether rates rise or fall, quality businesses with resilient earnings and strong balance sheets are crucial for good equity returns.
The companies in the portfolio are fundamentally strong, and have good compounding cash flows at appealing rates. Their qualities of strong market positions, robust balance sheets, and sustainable cash generation, make them ideal for the current and future uncertain conditions. These companies are also significantly invested in long-term trends like digitalization, health care related to ageing populations, and wellness. As well as having a positive impact on the global shift to becoming more carbon neutral.
Conclusion:
In times of market uncertainty and volatility it is vital to preserve your capital as much as possible. Clyde Rossouw and the rest of his team who manage Global Franchise seek out this objective. They look to provide capital growth, with opportunity for income in the long term. We trust Clyde and his proven track record, but we also believe in their strategy. Quality businesses will maintain sustainable long term growth. When their profitability is tested during times of higher inflation, earnings resilience (the ability to continue to bring in revenue) and strong balance sheets are key to ensuring their survival.
From the team at InvestLife we hope that this breakdown provided you with some useful information on the Ninety One Global Franchise Fund, and our views on why we like suggesting the fund to our clients when investing.
Wishing you a great weekend ahead!
InvestLife Team
