Top Fund Managers' 5 Global Stock Picks

We asked five top global equity fund managers which stocks they have been buying recently

David Brenchley 14 February, 2018 | 7:23AM

McDonalds' franchise model allows it to consistently grow dividends and buy back shares. Global equity stock picks

UK investors tend to have a home bias when it comes to stock selection. But with a falling market, and continued Brexit uncertainty, it could be time to consider a more global outlook.

Global funds have a much larger addressable universe in which to find stocks and while UK blue chips are prized for their income-paying capabilities, some global firms also have impressive dividend records. Take 3M (MMM), a firm that has not cut its payout in 101 years and has raised it for over 60.

Overseas companies can also give investors good growth prospects. “The world is a big place,” says Simon Edelston, manager of Morningstar Bronze Rated Mid Wynd International (MWY). “Even if the world economy isn’t growing, there’s normally bits of it that are.”

We spoke to five top fund managers to find out which global stocks they have been buying recently.

McDonalds (MCD)

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity Fund, says he’s cautious on property stocks due to the difficulty in gauging their value. However, he believes he owns “the world’s best property company”: McDonalds.

It’s rather unorthodox thinking, but Smit explains that the company owns all the properties, around the world, that their restaurants are run from. They then franchise the day-to-day running of them to individuals.

The first point Smit makes is that no other landlord-tenant relationship can be as good as this one because one is totally dependent on the other. “The success of that restaurant is critical for everybody.”

Secondly, like all property companies, McDonalds has the consistency of a rental income that increases every year. The firm then pays its dividend from that rental income it receives. As a result, they can increase that dividend year-on-year. That’s a trait Smit likes in a company.

On top of that, he adds, the franchise fee they get on top of the rental income is used to buy back shares – another attractive trait Smit looks for.

McDonalds’ share price is up a third since the beginning of 2017.

Dillards (DDS)

The high-street is one of the most unloved places for investors today. With online retail increasing in popularity, fewer people are heading to physical stores. This is a trend seen both in the UK and the US, where malls are closing at an unprecedented pace.

For the value team at Schroders, this is the kind of place where they find their best ideas. Dillards runs a chain of department stores in the States selling fashion apparel, cosmetics and home furnishings.

The share price tells you all you need to know about sentiment for the company - it’s halved in value in the past three years, to trade at $63 today.

However, Simon Adler, fund manager at Schroders, believes, after accounting for the ‘Amazon effect’, it has the potential to treble. “We incorporated the Amazon risk by taking 5% off sales for every year going forwards and still for 200% upside,” he explains.

One big positive for Dillards is the fact that it owns 90% of its stores. Most retailers rent their, which provides a big off-balance sheet liability. In contrast, Dillards can run as a net cash business, giving it a strong balance sheet.

Ferrovial (FER)

Infrastructure has become a big investment theme ever since Donald Trump became President of the United States championing spending on this area. China has also been spending big on infrastructure in recent years.

But this is not just a US and China story. Alex Araujo, manager of the M&G Global Infrastructure Fund favours Spanish firm Ferrovial, which co-owns London Heathrow Airport.

Araujo says airports are prized assets, as shown by the £2 billion paid by a consortium for London City Airport in 2016, which works out at north of 20 times cash flow. Araujo, meanwhile, bought Ferrovial on less than half that multiple, which is “very exciting”.

Ferrovial also owns the 407 ETR toll road in Toronto, which Araujo says has been called “the best infrastructure asset in the world”. That’s because the concession to run the road, bought 18 years ago, was for 100 years.

“Those long-life assets create significant value over time from places you don’t really expect,” Araujo says. He adds that Ferrovial has also been able to grow the toll between 7% and 9% annually, providing an attractive, growing income stream from just one asset.

Sonic Healthcare (SHL)

Outsourcer companies have been getting a bad rep of late, after the demise of Carillion, and Capita’s (CPIrecent profits warning. But Ben Peters and Chris Elliott have been buying Sonic Healthcare, an Australian outsourcing firm, for their Evenlode Global Income Fund.

Elliott says Sonic is his favourite stock in the team’s investable universe and describes it as “a pretty solid company” that has grown very quickly and built up a good reputation due to its excellence in the field.

Sonic is a medical diagnostics company that is the, or one of the, largest players in the pathology laboratory markets in Australia, the UK, Germany, Belgium, New Zealand, the US and Switzerland.

Hospitals send scans for the likes of biopsies and blood tests to Sonic’s labs and get them sent back in a timely fashion, helping them treat their patients correctly and swiftly. “What they do is very vital to patients,” Elliott says.

While its share price chart is impressive over the long term, the shorter-term numbers are rockier. It reached an all-time high of AUD24.58 in late June, before plunging to AUD20.66 by October. However, the stock has since made up that ground to trade at AUD24.43 today.

Toyota Industries (6201)

Edelsten recently sold Amazon on valuation grounds and re-invested the cash he had made on that investment into Japanese automation firms. One of those is Toyota Industries, the world’s biggest maker of forklift trucks. It also makes the motors for Toyota vehicles, which puts it in prime position to be leader in manufacturing electric vehicle engines.

Components from these forklift trucks, made by Toyota, are currently being used in automated warehouses and on construction sites to carry out work manual labourers used to do. Toyota also makes the batteries that run the forklift truck’s electric motors. Being the only batteries that work in them, meaning they get lots of repeat orders.

Edelsten says recent results were “miles ahead of what anyone thought”. Earnings per share this year are expected to almost double to 50 yen. Despite that, it’s valued at 14 times with a 2% yield. “In a world where people say you can’t find growth at a sensible valuation,” continues Edelsten, this stock proves you can if you look far afield enough.

Its share price has appreciated a fifth since the start of 2017, though has pared back from January’s record high.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
3M Co201.76 USD1.41
Capita PLC136.95 GBX-2.46-
Dillard's Inc79.87 USD3.23-
Ferrovial SA17.54 EUR0.95-
M&G Global Listed Infras GBP A Acc98.44 GBP0.71-
McDonald's Corp161.48 USD0.31
Mid Wynd International Inv Tr PLC O Inc510.00 GBX0.00
Sonic Healthcare Ltd24.08 AUD-0.12
Stonehage Flmg GlbBest IdeasEq C GBP Inc182.00 GBP0.21
TB Evenlode Global Income B GBP Acc1.01 GBP0.30-
Toyota Industries Corp7,050.00 JPY0.57-
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk