Mark Urquhart, manager of Edinburgh Worldwide Investment Trust tells MoneyWeek where he'd put his money now.
At Edinburgh Worldwide, our approach is to find firms we really like, no matter where they are listed, and then back them with conviction, taking a long-term view. If we change our mind, or are proved wrong, we jettison old ideas.
This happened with Nokia earlier this year - we thought it had sustainable advantages, but it now seems happy to sacrifice margins for market share.
To find such firms, I ask 12 straightforward, possibly naive, questions: Is there sufficient potential in the market to allow a sizeable increase in sales for the next five years? What could happen after that? What is the firm's competitive advantage? Is this company's people better than that of its competitors? If so, why, and at doing what? Are the margins worthwhile? Will they rise or fall? How is capital allocated? Is the stock attractively valued? Why doesn't the market understand this? What would make us sell? What further research is required?
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So what sort of stocks do I like now, having applied the above criteria? Some themes stand out. While I have a number of oil stocks, mainly ones that are reserve-rich and off the beaten track, I don't hold any Western majors, such as BP and Shell. However, I do hold CNOOC (China National Offshore Oil Corporation, ticker 883, HK$4.20), Brazil's Petrobras (PZE, $10.80) and Russia's Lukoil (LUKOY, $126.5). These are all producers with proven, and in some cases possibly understated, reserves.
In Europe, many of the firm we hold own brands that could do well in China: Porsche (POR3, e490.20), Hermes (RMS, e150.40) and Tiffany (TIF, $28.30). For Tiffany, the industry background is good: the US jewellery market has grown at 6% a year over the last 20 years, and there is potential for Tiffany both in metropolitan centres where it has no presence and in the export market, notably China. It has an enormously strong brand, strong management and operating margins in the high teens. It also trades on a relatively undemanding multiple.
There are some well-known "world leaders" in our portfolio, especially in the technology field: Canon (JPY, 5,060.00), Vodafone (VOD, 136p), SAP (SAP, e129.70) and Microsoft (MSFT, $27.90).
Conversely, there are a number of stocks that others might judge dull, but we think are great long-term growth franchises in the US: M&T Bank; Golden West (GDW, $114.16); Wrigley's (WWY, $63.32); Mohawk Industries (MHK, $84.25); and Patterson Dental (PDCO, $37.01).
On the other side of the world, I like the Zhejiang Expressway (576, HK$5.10), which operates two major toll roads in the Zhejiang province in China. This area is seeing rapid economic growth and accelerating traffic growth, 70% of which is currently commercial, but rising levels of private car ownership will be a significant factor in coming years. The firm should benefit from both increased traffic on its existing roads and from the extension of its network. This is an opportunity to invest in a quasi-monopoly operating in a friendly regulatory environment in a region of strong growth.
The stocks represent an eclectic bag, but the bottom line is that the companies themselves are the core of future growth. As a fund manager, I can grapple with this. What I find more difficult is choosing markets by taking a top-down view. There is just too much data, too many uncertainties, too many variables and too many interdependent factors.
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