Tackling volatility through selecting the best - Milford Asset

Tackling volatility through selecting the best

Stephen Johnston

Portfolio Manager

Stephen is the Portfolio Manager of the KiwiSaver Aggressive Fund 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.

The world has changed dramatically in the last five months and the pandemic has had a profound impact on all our lives in New Zealand.

In my investment career, I have experienced all sorts of shocks, from global recessions and banking crises, to terrorist attacks and natural disasters, but this is my first global pandemic.

While every shock is different, and each impacts share markets in different ways, one key trend I have observed is that stronger companies tend to emerge from a crisis even stronger.

There are many ways to define a strong company, but they tend to have similar traits. For example, they are well managed, tend to be industry leaders and have an edge over their competitors, which leads to higher levels of profitability. Most importantly, they have financial strength and business resilience, which are key attributes required to emerge as leaders of the pack.

All Blacks of the Investment World

In the Milford Global Equity Fund, we own 50 high quality companies that dominate their industry and have attractive long-term prospects. I like to think of them as “All Blacks of the investment world”. A portfolio manager’s job is a bit like an All Blacks selector. While Ian Foster and his selection panel choose an All Blacks team that will dominate their opposition and hopefully deliver the ultimate prize of the Rugby World Cup, we pick companies that we believe will win over the long run and deliver the best risk-adjusted returns.

Any successful All Blacks team is made up of players with different strengths and weaknesses, but when combined into a team, they complement each other and their sum is greater than their parts. While it would be nice to have a team of just Richie McCaws and Dan Carters, you probably would not secure a lot of lineout ball, and imagine the scrums! Investing is no different in that we construct a portfolio of companies with different attributes that are diversified by region, sector, and industry, that we believe can win in all environments.

Investment First XV

Being a staunch rugby fan, I have picked an Investment First XV from our portfolio of 50 companies. I will start with my forward pack, and to make it more interesting I have selected my ultimate All Blacks forward pack from a lifetime of watching rugby. The companies are not the flashiest but they are the powerhouses of our Global Fund, driving our portfolio up the pitch with their size and strength.

Tighthead Prop – Olo Brown

Not the most dynamic player on the pitch but Olo was a pivotal member of the All Blacks as the cornerstone of the forward pack. A scrumming machine with one of the straightest backs in rugby.
Martin Marietta plays Olo’s role in our portfolio, the US aggregates (rocks and stones) producer is rock solid and provides some stability to our portfolio in times of volatility.

Hooker – Sean Fitzpatrick (Fitzy) – Captain

My captain Fitzy was an inspiring leader, a key decision maker, never took a step back, dominated the opposition and was as competitive as anyone who played the game. A person anyone would want on their team.

Apple is in a similar vein; the world’s largest company has dominated its competitors since creating the revolutionary iPhone that created the smartphone ecosystem. Apple’s iPhone and iOS operating system has consistently been rated as head of the pack in terms of functionality, customer loyalty, engagement, and security. Like Fitzy, founder Steve Jobs was an inspiring and visionary leader and new CEO Tim Cook has continued to innovate with a focus on software and services to augment the user experience. Apple is a key member of my tight five.

Loosehead Prop – Tony Woodcock

Tony was a powerful scrummager, a dependable player, and who can forget his part in securing the 2011 World Cup win in Auckland.

Costco is one of our more dependable portfolio holdings, delivering when times are tough, as we’ve seen during the COVID-19 crisis. Costco’s membership model exhibits strong customer loyalty with high renewal rates as consumers are attracted by the large range of products at low prices in a low frills environment. The good news is Costco is opening in NZ soon.

Locks – Colin Meads (Pinetree)

I was never lucky enough to see Colin play rugby but from what I have read and watched on YouTube, he was a true legend and a towering presence in the All Blacks team. Locks like Colin have to soar into the sky to secure the lineout ball and also provide oomph in the scrum.

US mobile tower companies Crown Castle and American Tower are our “tall timber” in the portfolio. We think the tower business is very attractive given their long-term contracts that provide a highly visible and stable revenue stream.  Together, Crown Castle and American Tower make a solid dependable unit and create a reliable engine room in my starting XV.

Locks – Brodie Retallick

Brodie is another spectacular player, dynamic in the open field while also performing his tight duties.

Crown Castle, like American Tower, is a key beneficiary of the “data boom” globally as data usage in the US roughly doubles every two years. The massive investments required to upgrade to 5G networks in the US is a big tailwind for the towers. We see the towers soaring to new heights.

Loose Forwards

Flankers have to be great all-rounders, tackling, securing ball at the breakdown, ball carrying and acting as the link between forwards and backs. I have chosen two open side flankers (twin fetchers) in Richie McCaw and Michael Jones. Both unbelievable players in their own right. Special mention to my fellow Southlander Paul (Ginge) Henderson, an inspiration in my flanker playing days at Otago university.

Openside Flanker – Richie McCaw

Richie was one of our greatest ever All Blacks and a commanding presence on the field. It is the consistency of his performance that really stands out. Did he ever have a bad game?

In a similar light, Visa is a commanding presence in electronic payments with over 3.4 billion Visa cards in circulation and over 50 million merchants accepting their cards. Visa’s position in the world of electronic payments is unparalleled. Visa has translated this dominant competitive position into unmatched levels of profitability that we expect to continue for many years to come. Being a South Islander at heart, Richie is my GOAT (greatest of all time) and when thinking about companies, Visa is hard to beat.

Blindside Flanker – Michael Jones (Ice Man)

What a player, as described by John Hart as “almost the perfect player”, physical, fast and an incredible link man. By all accounts, a gentleman off the field as well.

A very similar business to Visa, Mastercard takes the other flanker spot in my first XV. Smaller in size than Visa, it is the only other payments company with a truly global presence. Mastercard is a key link in ensuring electronic payments are processed smoothly globally. In its prime, Mastercard is a cash machine, generating incredibly high profit margins and, like Ice man, is almost the perfect company.

No. 8 – Zinzan Brooke (Zinny)

Zinny was probably one of the most creative No. 8s we ever had, with amazing all-round skills. Who can forget his almost 50-meter drop goal in the 1995 World Cup! Former All Black coach John Hart once said, “there will never be another player like him”.

Amazon plays that role in our portfolio. Just as Zinny disrupted opposition he came up against, Amazon has transformed the brick & mortar retail industry and is one of the most disruptive forces ever seen. A dynamic company, it continues to evolve into new and exciting areas such as cloud computing and digital media, and is likely to shape many industries in years to come.

So, there you have it, my investment forward pack to conquer all and emerge from this crisis even stronger. Next time I will unveil the glamour players, the backs, to complete my Investment First XV.

Remember, a team above all, above all the team.

Game on ladies & gentlemen!

Disclaimer: The material contained herein is based on information believed to be accurate and reliable although no guarantee can be given that this is the case. This 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. Before making any financial decisions, you may wish to seek independent financial advice.

 

Disclosure of interests: Milford Funds Ltd. holds shares in all of the above mentioned companies on behalf of its clients.