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Exclude to excel: AAA-rated Heugh’s shunning strategy

Exclude to excel: AAA-rated Heugh’s shunning strategy

Morgan Stanley’s Kristian Heugh has a nose for good, long-term investments, but perhaps more importantly, he is also keenly aware of what to avoid.

Heugh runs several funds at the firm, including the $2.7 billion Morgan Stanley Investment Funds Global Opportunity strategy, and says part of the fund’s strong performance is down to avoiding companies which hold high levels of debt.

‘We have avoided companies that have weak competitive advantages, low return on invested capital and slow growth. These types of low-quality businesses are historically found more in the financials, energy and materials sectors.

‘In the Global Opportunity strategy, we also try to avoid companies with negative externalities that are not being priced into their income statement, as we believe there are long-term ESG risks associated with these types of businesses,’ he says.

Aiming high

With these points in mind, Heugh says an effective approach to bottom-up stock-picking is to focus on high-quality companies valued at less than their intrinsic worth.

‘On a global basis, we tend to find more of these types of holdings in the consumer, healthcare and technology sectors,’ he says.

At present, Heugh has 37.4% allocated to information technology, compared with a 17.6% weighting in the MSCI All Country World index.

‘Within technology, we have favoured service-based platforms that enhance their competitive advantages through growth, instead of one-time sale product companies whose advantages can be competed away much more quickly.

‘All the equity holdings in the portfolio are contrarian and we have historically had more than a 90% active share compared with the MSCI ACWI benchmark, so our fund is very different to what can be purchased with an ETF.’

This contrarian stance has been a big contributor to the fund’s performance, says Heugh. ‘As a result, the vast majority of alpha has historically been contributed from stock selection rather than various factor exposures.’

This interview originally appeared in the 2017 edition of Citywire’s Euro Stars, which was published in November.

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