Selecting an Investment First XV - Milford Asset

Selecting an Investment First XV

Stephen Johnston

Portfolio Manager

Stephen is the Portfolio Manager of the Aggressive Funds (KiwiSaver and Investment Funds) and Co-Manager of the Milford Global Equity Fund. He has over 20 years of investment experience across global financial markets and different asset classes. Prior to joining Milford in 2013, Stephen was a partner at London based Adelante Asset Management where he was a Senior Portfolio Manager, managing an Emerging Market Equity Fund. Prior to Adelante, Stephen was a Portfolio Manager in London at Threadneedle Investments and Convivo Capital Management, managing various Emerging Market Funds.

Stephen holds a Bachelor of Laws and a Bachelor of Commerce from the University of Otago and was admitted to the Bar as a Barrister and Solicitor of the High Court of New Zealand in 1995.

Before I start, let me bring you up to speed. In a previous blog titled “Tackling volatility through selecting the best”, I started the process of selecting an Investment First XV (15 companies) from Milford’s Global Equity Fund of 50 companies, that are world beaters. I like to think of our companies as the “All Blacks of the investment world”.

Being an avid rugby supporter, I knew that I could not stop with just selecting the tough guys i.e., the forward pack in my previous blog. I had to complete my Investment First XV, with the selection of the glamour boys, the glory boys, the backs that set stadiums alight. As I pointed out last time, there are many similarities between selecting an All Blacks team and putting together an investment portfolio. You are trying to constantly upgrade your team or portfolio to ensure you have the best players or own the best companies. And just like putting a winning All Blacks team together, diversity is important, taking a broad range of the best players or companies and combining their strengths into a more powerful team or portfolio.

So here we go.

Fullback – Christian Cullen (“Paekakariki Express”)

 

To be honest, Christian Cullen is probably my all-time favourite player. He was an “excitement machine”, a player who wowed the crowd with mesmerising runs, like a highly-tuned, purring Ferrari. Cullen had a certain panache about him.

Ferrari is the epitome of sports cars; sleek and sophisticated, with the performance of a Formula One racing car. The Ferrari name conjures up images of fast, highly exclusive cars that utilise state of the art technology. The heritage of the brand enables significant pricing power, and Ferrari taps into the growing population of high-net-worth individuals. The roar of a Ferrari is analogous to how crowds responded when Cullen received the ball.

 

Left wing – Jonah Lomu

 

                   

Rugby writers all agree that Jonah revolutionised wing play. As they pointed out, wings weren’t supposed to be 6 foot 5, weigh over 120kg and run like a cheetah. At full flight, Jonah was unstoppable (just ask former England captain Will Carling or Mike Catt). Who can forget Jonah’s performance at the 1995 World Cup, arguably the most dominant display by an individual at a World Cup.

In a similar vein, Alphabet (parent company of Google) is dominating the world of internet search like no other. Between all of Google’s platforms including Google Search, YouTube and Maps, 90% of all internet searches are taking place through the company. This is what you call market domination. While competitors have emerged over the years, they are quickly swatted away like a “Jonah fend”.

Right wing – Jeff Wilson (“Goldie”)

 

     

This pick may be a little controversial. I hear you saying, “what about John Kirwan or BG Williams”? But let me remind you, I am a born and bred Southlander, and we back our own. And Goldie, what a player! A great all-rounder, he could catch, pass, kick and chase, and who can forget Jeff’s great body swerve. He had all the skills. Let’s not forget he was an extraordinary athlete representing NZ in both rugby and cricket, and by all accounts he was handy at many other sports. A true legend. The only slight blemish was the Gregan tackle on Jeff in 1994, but no one is perfect.

Like Jeff, S&P Global is a great all-rounder, combining several world class businesses. S&P owns the world’s largest credit rating agency as well as benchmark indices including its flagship benchmark: the S&P 500 (500 largest companies in the US). Once a benchmark is accepted by market participants, they are difficult to displace. In addition, S&P owns Platts, which is like an index business for certain commodities, with Platts providing pricing under long term contracts. Finally, there is the Market Intelligence business that supplies data and a range of financial information to customers like asset managers, investment banks etc. We believe that the recently announced acquisition of IHS Markit will make S&P Global even more formidable, once again showing that management has the “golden touch” when it comes to acquisitions.

Centre – Frank Bunce (Buncy)

 

     

A tough call, with “Smokin’ Joe” Stanley a worthy challenger. A late bloomer you might say, with Frank not making his All Blacks debut until he was 30. A powerful runner and defender, Frank was an integral part of the successful All Blacks team in the nineties.

Similar to Frank, Adobe is something of a late bloomer with its signature photoshop photo editing suites first created in 1988. But this software company has not stood still. Under the leadership of CEO Narayen, Adobe has made critical changes ultimately converting to a subscription model in 2013, a feat never previously attempted for a company the size of Adobe. Over time, the company has added new products and features to its product suite both organically, and through acquisition, to now have the world’s most comprehensive portfolio of tools used in print, digital, and video content creation.

Second five – Ma’a Nonu

 

         

This blockbuster midfielder is one of the best line breakers I have seen. Since his All Blacks debut, Ma’a Nonu has focused on continually improving his game. Of note, Nonu improved his distribution skills and over time, developed a pretty handy kicking game. My most memorable rugby moment of Nonu’s, was his try in the 2015 World Cup final, where he showed a very impressive turn of pace to score the crucial try.

US life sciences & diagnostics giant Danaher has evolved its business model overtime through making acquisitions in attractive end markets with strong growth prospects. It has built a very impressive portfolio of investments that sell into some of the highest-growth niches in healthcare and water testing/ treatment. Their Danaher Business System (“DBS”) is a set of constantly updated best practices that functions as a playbook for all employees. At its core, DBS comes from lean manufacturing and helps the company to drive continuous improvement, boosting efficiencies and improving profit margins.  The DBS engine drives the company through a never-ending cycle of change and improvement, similar to Nonu’s development as a player.

First five – Dan Carter

 

     

There is only one Dan Carter, what a player, a true superstar. Dan could perform at a high level under tremendous pressure, and he was a match winner. The best individual performance I have ever seen in a rugby game was Dan’s performance in the Lions test in 2005. I would endorse rugby experts that rated Dan’s performance as a 10 out of 10.

Shopify is on a roll right now, like Dan was at his prime. This is one of the fastest growing companies in the world, democratising e-commerce by allowing small retailers to be able to compete with large companies online. Small retailers are able to sell their products across multiple sales channels (omnichannel) including online, mobile, marketplaces, social media, and brick & mortar. Shopify’s platform becomes the backbone of small businesses; it’s easy to use, has a variety of built-in features, and continues to add new products that facilitate e-commerce such as payments, fulfilment, and shipping. In New Zealand there are over 15,000 online stores powered by Shopify. Move over Amazon, as Shopify is on the prowl!

Half back – Aaron Smith

 

         

Another tough call but how can you go past Aaron. Special mention to fellow Southlander Justin Marshall, a phenomenal player in his own right. Aaron has a comprehensive game with a bullet-like pass, and amazing vision with what seems like eyes in the back of his head. He orchestrates the backs and forwards and is the heartbeat of the All Blacks. On top of that, he has a great kicking game and can make darting runs to surprise the opposition. You could argue he is the bionic man. On a personal note, it was great to be present for his 100th test.

Intuitive Surgical is the leading manufacturer globally of robotic assisted surgery systems, with the ‘Da Vinci’ robot. They have a first mover advantage with a two-decade lead over competitors; there are now over 6,000 Da Vinci robots operating globally, including in New Zealand. Da Vinci is a “safe pair of hands”, giving surgeons bionic-like powers that enable them to see things they can’t see with the naked eye. Patients have less pain, less blood loss, and a quicker recovery. Some argue the Da Vinci system has changed surgery the same way as the iPhone has transformed mobile use.

So, there you have it. The glamour boys to complete my Investment First XV. When combined into a team, these companies complement each other and will improve the odds of Milford’s portfolio being ahead of the market once the final whistle blows.

One team, one dream.

Game on ladies and gentlemen.

Disclaimer: Milford is an active manager with views and portfolio positions subject to change. This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to a Financial Adviser. Past performance is not a guarantee of future performance.