Sanlam Global High Quality (IE00BJWHZ516) fund manager Pieter Fourie believes global stocks are better investments than UK-focused businesses.
The fund invests in high return-on-capital businesses with predictable cash flow and long-term revenue growth.
Its top holdings include Marmite owner Unilever (ULVR) and Johnnie Walker whiskey seller Diageo (DGE).
Over the last five years, the fund has delivered a 111.9% return compared to its benchmark MSCI World's 101.2% return.
SLUGGISH GROWTH
Fourie suggests sluggish growth in the UK economy and online competition is affecting the retail sector - an area his team typically avoids.
Inflation has hit retailers over the last year and increased raw material costs, which businesses hope to offset through price hikes.
The anticipated hike in UK interest rates in the near future will make it more expensive for consumers to borrow money via credit cards and personal loans. Mortgage costs will also go up for anyone on variable-rate deals.
Retail sales are beginning to show signs of being affected by the Brexit process although the figures for February were better than forecast.
BOOST FROM WEAKER STERLING
Fourie’s fund includes a few UK-listed firms although these have a global reach, which means they benefit from the devaluation of sterling in the wake of the Brexit vote.
He comments: ‘We will use any political volatility to invest in businesses if we know there’s an opportunity to as we’ll benefit from the weak pound.
‘That’s exactly what happened to us on 24 June. We were aggressively buying Diageo because we knew weak sterling benefits their bottom line.’
Fourie is unlikely to own retailers, mining companies, utilities or banks due to weak free cash flow generation, lower returns on capital and high levels of balance sheet leverage.
He says: ‘This leaves a smaller universe of companies that we are likely to own.
‘That said, should the valuation of some of the well-run businesses that meet our fundamental screening process start to look more reasonable, then we may start to see more value and allocate capital to the UK.’
