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Why this AA-rated global equity PM shuns overrated consumer goods names

Columbia Threadneedle portfolio manager explains how he finds underappreciated names in crowded sectors.

Why this AA-rated global equity PM shuns overrated consumer goods names

Although consumer goods names have been attracting investors this year, some companies within the sector are clearly overrated. 

This is the view of AA-rated portfolio manager David Dudding, the manager of the Threadneedle (Lux) Global Focus fund, who sees the rise of Amazon and Alibaba, coupled with the weakening of the middle classes in developed markets as some of the headwinds for the space. 

‘Over time we have reduced our exposure to companies producing essential goods, which remain of high quality but which have experienced difficulties due to a number of reasons, including the change in the distribution model, which has led to to a fragmentation of the sector and therefore to lower returns in the future,’ he said.

Dudding addedd that while quality may be expensive, it can be found in areas that  investors might not automatically think of.

For example, the fund manager has recently added FIS, the world’s largest payment and processing company and a financial technology business.

‘The share price lagged behind many other ‘fintech’ businesses during the crisis because it has a significant offline presence and makes many of its profits by supplying technology to ‘mainstream’ banks, Dudding said. 

‘The company benefits from both the growth of e-commerce and online payments, and the accelerated need of banks to update their technology offering,’ he added. 

Similarly, Dudding has added a lot of value through emerging market financial companies, where he is leaning towards both Asian and multinational companies.

‘We like to point out that over half of the world’s population now lives in Asia and that considerable wealth has been created in that part of the world,’ he said.

Network effects 

The Columbia Threadneedle fund manager hasn’t been sitting idely during volatile moves that the market experienced in recent months.

The manager has introduced exposure to Danaher, a US company operating in the life sciences sector, and Disco, a Japanese semiconductor manufacturer to his $1.36 bn fund.

‘Historically we have tended to be overweight the healthcare sector as the population gets older and richer they need more healthcare and products can be very differentiated, and backed by patents, for example.’

He added that another long-term overweight is technology, in particular software titles, where the marginal cost of producing a new product is very low and the incremental margins are correspondingly high. 

‘We like companies that benefit from the ‘network effect’, that is to say the fact that the value grows as more people use it, especially card payment networks like Mastercard,’ he added. 

The manager, who has been holding Mastercard in his top three positions for a while, said the firm has been criticised for having lower profit margins than rival Visa, but is still spending its money well. 

According to the fund’s latest factsheet, the portfolio has 4.9% of exposure to the payment giant. 

‘The company will benefit from the move to mobile and digital payments and the network effect. Mastercard together with Visa controls 85% of the card payments market and benefits from a structural trend: the growth of e-commerce which is obviously based on digital transactions, alternatives to the use of cash,’ he said.

Dudding’s investment philosophy has been contributing to the fund’s performance. According to Citywire data, the strategy outperformed its sector’s average by 14.8% over the past year to October 2020, and by 39.5% over the three-year period. 

This outperformance also translates into flows. According to the Morningstar data, the fund has attracted over $374m over the past year till the end of October.

 

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David Dudding
David Dudding Average Total Return:
31.28%
23/106 in Equity - Europe Excluding UK (Performance over 3 years)
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