Each week, aprofessional investor tells us where he'd put his money. This week:Algernon Percy of the Waverton Portfolio Fund
I prefer to invest in large international firms that can produce sustainable long-term earnings growth, thus compounding returns over many years. This is the most beneficial strategy for investors who want to preserve or enhance their long-term wealth, because it minimises the leakage from tax and trading costs that comes with a higher-turnover fund. The bulk of Waverton's stock-picking efforts are directed towards quality growth companies: shares such as Compass, Prudential and Lonza represent the core of the Waverton Portfolio Fund. Traditionally, consumer staples such as Procter & Gamble and Coca-Cola would represent the backbone of a portfolio like this, but investors' risk aversion, together with extremely low bond yields, have made them expensive, so the only firm of that nature we hold at present is Reckitt Benckiser. We prefer to concentrate on more economically sensitive companies that still offer long-term growth, such as Compass, WPP and Lockheed Martin.
We recently added a position in Novo Nordisk (Copenhagen: NOVOB), a global healthcare firm that specialises in diabetes. Following weaker growth expectations, it is now on a price/earnings (p/e) ratio of just half the 30 times earnings it reached a few years ago. A tougher US drug-pricing environment has affected the sector, but Novo Nordisk benefits from strong demographic trends (age and obesity), limited competition, high barriers to entry and solid cost control. We believe its insulin portfolio is more differentiated from rivals than the market realises.
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Alps Electric (Tokyo: 6770) is a premium components maker that owns significant intellectual property. Growth opportunities for Alps include the higher use of camera actuators in new smartphones. As the primary supplier of haptic components (eg, touch-sensitive buttons), the company is also experiencing an increase in sensor sales. Furthermore, increased connectivity in the automotive sector, driven by the potential for driverless cars, is positive and Alps has a 50% global market share in this niche. In the course of 2015 and 2016 the stock fell 60% as a combination of a strong yen and disappointment with the iPhone 6S led to a fall in sales. But trading at two times book value (for a firm generating a 20% return on equity) and a p/e ratio of 12 times forecast earnings, this represented an attractive entry point for us and the share price continues to recover.
Baidu (Nasdaq: BIDU) owns China's largest search engine, with 70% market share and 643 million monthly active users. It also has China's largest mobile mapping app and subscription video streaming site. Baidu's core businesses are highly profitable, although the early-stage transaction-service businesses are exciting but require heavy investment. In the meantime, we value the core search element at only 12 times earnings. Baidu's market capitalisation per user is just a quarter of that of Google.
Algernon Percy is manager of the Waverton Portfolio Fund
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