The stars in the east
Once again, there is huge structural demand, with Chinese people currently drinking just three cups of coffee a year against 99 in Taiwan and 165 in Hong Kong.
Even if Chinese growth comes down to mid single digits in the coming years, we do not see that hitting coffee demand, which reflects a longer-term shift in consumer habits,” he adds. “Nestle is currently marketing its coffee to university students to ingrain the product and we see huge growth potential from developing this kind of brand loyalty.”
Dudding describes Nestle as the kind of good compounder business he likes, growing around 15% a year and providing steady returns for shareholders.
“That growth is coming off slightly and we actually prefer names such as Unilever in the consumer space but I have Nestle in my own pension for its long-term wealth compounding effect.”
Anheuser-Busch Inbev – the world’s top brewer – is the fund’s largest holding, once again encapsulating the overseas exposure story with large shares in markets such as Mexico.
Look deeper, because they’re worth it
With the pricing power theme leading to a consumer goods bias in the portfolio, Dudding argues against claims this sector is fundamentally overpriced and urges investors to look beyond the surface and price/earnings ratios.
A stock such as L’Oreal for example trades on around 20 times earnings but the manager notes its gross margins of 80%, of which 30% goes on advertising.
“L’Oreal could halve that spend and cut its P/E to 10 times,” he says. “That would be an entirely wrong strategy for growing the business but its profits are effectively what the company wants them to be and we would warn against extrapolating too much from P/Es, with free cashflow yield a better measure of sustainability.”
The good, bad and ugly of stocks
That said, Dudding admits he would be unlikely to pay more for a stock than L’Oreal’s current valuation.
Elsewhere, he notes companies meeting his pricing power criteria across a full range of sectors from chemical distribution, to radiation therapy providers to non-life insurers.
Materials is another overweight, with chemical stocks Syngenta and Brenntag in the top 10, and financials remains a long-term underweight, although the position has been growing in recent years.
“This is not down to increasing bullishness on Europe but we are more confident on some of the core banking names as they continue to rebuild,” says Dudding. “We remain clear of peripheral banks, which clearly have more work to do.”
Despite the underweight, there are three financials in the portfolio top 10, non-life insurers Sampo and Allianz and Swedish bank Handelsbanken. “Pricing power is hard to find in banks as mortgages are a commodity product but Handelsbanken is one that competes on service and customer satisfaction rather than price, leading to the solid compounder returns we like,” adds the manager.
Country positions are largely a result of stockpicking although Dudding notes a Nordic overweight and an ongoing underweight in the European periphery – although he highlights a position in Irish Ryanair and believes Spain is getting more interesting as it continues to recover from the financial crisis.
Comments