Welcome to the inaugural issue of Investment Trust Quarterly.
The investment company industry has continued to adapt to meet investors’ needs and, in the last decade, the infrastructure, debt and property sectors have evolved to satisfy demand for income. While all investment trusts offer a number of special features that other types of funds cannot, a good investment trust utilises its natural advantages with a clear investment objective and strategy, consistently delivering – or over-delivering – on its promises. Last year, to mark 150 years since the launch of the first investment company, the AIC produced a list of Dividend Heroes: in these pages we explore this theme in the European context. “Companies that consistently grow their dividends, consistently outperform,” says Fidelity’s Sam Morse. Elsewhere Dale Nicholls reviews the ‘premiumisation’ trend in China and the outlook for local brands capitalising on domestic consumption. Fufeng Group is a Chinese company with a 50% global market share in flavour enhancer Monosodium Glutamate: not a premium brand but it is one of Nitin Bajaj’s preferred stocks. Bajaj, a Fidelity small caps manager, discusses the pricing power and good growth prospects of Asia’s strongest smaller companies. Finally, we review the continued popularity of UK equity trusts despite the ongoing delays over the UK’s exit from the European Union and the level of outflows suffered by their open-ended counterparts. We hope you find our supplement both useful and thought-provoking.
This publication is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Fidelity’s investment trusts have the potential of having high volatility either from their composition or the techniques used to manage them. They can utilise financial derivative instruments for investment purposes, which may expose the trusts to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. The trusts may invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Please note that the views expressed may no longer be current and may have already been acted upon. Investments should be made on the basis of the current prospectus, which is available along with the Key Features Document, current annual and semi-annual reports free of charge on request by calling 0800 700 000. Fidelity only gives information on products and services and does not give investment advice to retail clients based on individual circumstances. Any comments or statements made are not necessarily those of Fidelity. Issued by FIL Pensions Management and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. UKM0419/23920/SSO/0719
Contents
2019’s leading sectors Introducing the Fidelity range China’s consumer market
Value in Trusts: Which sectors have outperformed so far in 2019?
Introducing the Fidelity investment trust range
Why dividend payers will triumph in troubled Europe
The value of Asia’s hidden small caps
Value in Trusts: Which sectors have outperformed so far in 2019? Introducing the Fidelity investment trust range How China’s ‘hipster’ brands are driving a compelling domestic consumption story Why dividend payers will triumph in troubled Europe The value of Asia’s hidden small caps
How China’s ‘hipster’ brands are driving a compelling domestic consumption story
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Green as the new black ESG is an area that has been attracting increasing attention within the trust space, and is being incorporated into a broad range of strategies across the sector. William Sobczak, investment analyst at Kepler, says: “Companies who fail to recognise the movement risk being left behind, and research from Ammann et al. in 2018 showed this. They found the average fund that gained a high Morningstar ESG rating saw a 0.45 percentage points per month greater net flow than an average-rated fund, and 0.78 percentage points higher than low-rated funds.” Elliott notes it is particularly interesting to see Asian and EM equities trusts adopting ESG policies, such as Mobius Capital Partners, which has made this central to its investment thesis. “While it would be easy to dismiss this as a passing fad, we believe it is becoming an increasingly important consideration in investment and reflects the desire of the ultimate investors for their capital to be deployed in a way that benefits society rather than simply maximising returns,” he says.
The growing popularity of higher yielding alternative assets has assisted the sector’s profile in the first quarter, with demand for these assets stronger after what was arguably a dismal year for the asset class
Dividend heroes Meanwhile, one way to pick a trust that will remain stable in volatile markets is to look at the AIC’s list of Dividend Heroes, which have consistently increased dividends for the past 20 years or more. Winterflood’s Elliott says: “What we believe is likely to remain in demand is those trusts that have impressively consistent records of dividend growth and offer greater dividend certainty than their open-ended equivalents as a result of the use of revenue reserves.” This year’s list is led by City of London, Bankers and Alliance trusts, which have increased dividends for 52 consecutive years, while Caledonia comes in a close second with 51 years. The Next Generation of Dividend Heroes (see box, p6) list can also offer some up-and-coming names that are getting close to a 20-year streak. However, Suter warns investors still need to do their research, as despite continuing to pay out, some of these trusts have consistently low yields: “For example, Scottish Mortgage makes it into the list because it has raised its pay-out for 36 years, but the trust doesn’t have an income focus and yields just 0.62%.”
espite Brexit fears and China’s slowing growth dominating headlines in the first quarter of 2019, discounts across the investment trust sector have continued to narrow: at the end of March, the
average discount stood at 3.8%(1), down from 4.4% at the start of the year, marking a historically tight level. Investment companies trade at a discount when the share price of the trust is lower than the company’s net asset value. If and when a discount narrows, investors can achieve a return that is better than the performance of the underlying assets. And in the short term at least, the main driver of narrowing discounts in the sector this year has been rising markets, leading a number of investment companies to outperform in the first few months of the year. However, this tightening is also part of a long-term trend according to the Association of Investment Companies (AIC), which notes the average discount stood at 15.6% at the end of February 2009(2). Meanwhile, the growing popularity of higher-yielding alternative assets has also assisted the sector’s profile in the first quarter of the year, with demand for these assets stronger after what was arguably a dismal year for them in 2018. This has been reflected in the gains many infrastructure trusts have seen over the past 12 months, with premiums growing from 7.9% to 8.6% since the end of last year(3). Similarly, renewable trusts are trading on a premium of 8%, up from 5.5%, whilst the private equity sector saw the sharpest narrowing of discounts by 7.5% year-to-date(4). UK assets Perhaps the most surprising trend over the last few months has been the continued popularity of UK equity trusts despite the ongoing delays over the UK’s exit from the European Union and the level of outflows suffered by their open-ended counterparts, according to Simon Elliott, head of IT research at Winterflood. For example, even though the UK Equity Income sector is still trading at a discount, the figures have narrowed from 6.1% over the past year to 3.2%5, and according to AJ Bell’s personal finance analyst Laura Suter, the asset class remains a “perennial favourite” with advisers. Yet worries over Brexit and the ongoing decline of a number of UK High Street names has led to a number of difficulties for property trusts, and the sector has seen average discounts widen to 7.3% from a 12-month average of 2.8%, as investors fear highly-geared real estate trusts could be burnt as a result of a potential ‘no-deal’ exit from the EU. In spite of these concerns, there is an argument to be made for property trusts as an alternative to open-ended property funds, which in the immediate aftermath of the 2016 Brexit vote were forced to close due to the large number of redemptions from investors. And whilst closed-ended property trusts may see shares fall in the short term, there is the possibility of a rebound if Theresa May’s government is able to achieve a somewhat ‘softer’ exit. This combined with the income draw of property trusts – the average trust is still yielding 4.6% – means the sector could still represent value for those willing to invest.
ESG is an area that has been attracting increasing attention within the trust space as it becomes an increasingly important investment consideration
Many infrastructure trusts have seen gains over the past 12 months, with premiums growing from 7.9% to 8.6%3
A report by Investment Week
Sources: (1) Thomson Reuters and Winterflood. (2) (ex. 3i and VCTs). (3) Numis. (4) Aberdeen Standard Investments. (5) AJ Bell
*Source: AIC
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Welcome
Value in trusts
Investment trust range
China’s ‘hipster’ brands
Dividend payers
Hidden small caps
UK assets Perhaps the most surprising trend over the last few months has been the continued popularity of UK equity trusts despite the ongoing delays over the UK’s exit from the European Union and the level of outflows suffered by their open-ended counterparts, according to Simon Elliott, head of IT research at Winterflood. For example, even though the UK Equity Income sector is still trading at a discount, the figures have narrowed from 6.1% over the past year to 3.2%5, and according to AJ Bell’s personal finance analyst Laura Suter, the asset class remains a “perennial favourite” with advisers. Yet worries over Brexit and the ongoing decline of a number of UK High Street names has led to a number of difficulties for property trusts, and the sector has seen average discounts widen to 7.3% from a 12-month average of 2.8%, as investors fear highly-geared real estate trusts could be burnt as a result of a potential ‘no-deal’ exit from the EU. In spite of these concerns, there is an argument to be made for property trusts as an alternative to open-ended property funds, which in the immediate aftermath of the 2016 Brexit vote were forced to close due to the large number of redemptions from investors. And whilst closed-ended property trusts may see shares fall in the short term, there is the possibility of a rebound if Theresa May’s government is able to achieve a somewhat ‘softer’ exit. This combined with the income draw of property trusts – the average trust is still yielding 4.6% – means the sector could still represent value for those willing to invest.
Fees Fee reduction has been a growing trend in the trust space, and a number of notable names in this sector have reduced their charges of late. The City of London trust for example, revealed in its half-yearly report earlier this year that it would be cutting its management fee which equates to a reduction of circa 10%. The announcement followed Baillie Gifford’s news at the end of 2018 that it too would be reducing fees on four of its investment trusts: Edinburgh Worldwide Investment, Pacific Horizon, Baillie Gifford Japan and Baillie Gifford Shin Nippon. This announcement took the number of trusts that reduced fees in 2018 to 37, according to the AIC. This was an increase on 27 trusts that reduced or amended their fees in 2017. James Budden, director of retail marketing and distribution at Baillie Gifford, explained the fee reduction for these trusts was part of the group’s commitment to offer value for money to investors: “Our trusts have seen strong asset growth and have been busy issuing new equity. We are keen to pass on the benefits of increased scale to shareholders where possible.” Overall, fee reductions have led to a number of sectors, such as global growth, looking more attractive from a value perspective, especially with so many of the trusts boasting many decades of excellent performance and ongoing charges as little as 0.37%.
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Fidelity Special Values PLC
Trust objective The investment objective of the Company is to achieve long term capital growth primarily through investment in equities (and their related securities) of UK companies which the manager believes to be undervalued or where the potential has not been recognised by the market.
Manager’s investment approach Alex Wright favours companies which are likely to have already gone through a sustained period of underperformance, but the risk of further downside is limited. There are two main pillars to his approach: (i) Alex looks to invest in companies that have exceptionally cheap valuations or some kind of asset that should stop their share prices falling below a certain level. (ii) Alex looks for events that could significantly improve a company’s earning power, but are not currently reflected in the company’s share price.
Fidelity China Special Situations PLC
Trust objective The investment objective of the Company is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China and Chinese companies listed elsewhere. The Company may also invest in listed companies with significant interests in China.
Manager’s investment approach Dale Nicholls believes that the best investments are in companies with good long-term growth prospects, which are cash generative and are controlled by strong management teams. Ideally these factors are underappreciated by other investors and not reflected in valuations.Dale’s search for unrecognised growth leads to a preference for small and mid-cap companies. These segments tend to be less well researched and offer more mispricing opportunities. Risk management is a key part of Dale’s process and he places significant emphasis on company meetings in order to fully understand their corporate strategy and monitor their progress.
1 Index Name: FTSE All Share TR.
Fidelity European Values PLC
Trust objective The investment objective of the Company is to achieve long-term growth in both capital and income by predominantly investing in equities (and their related securities) of continental European companies.
Manager’s investment approach Sam Morse believes that dividend growers outperform consistently. This is because such companies are invariably healthy businesses with stable earnings growth potential and the ability to generate high levels of free-cashflow – all factors that should be rewarded by the stock market in the fullness of time.Utilising a clearly defined and repeatable bottom-up approach, he looks to build a relatively concentrated portfolio of European companies which he believes have the ability to grow dividends sustainably over a three to five year horizon. These are identified by some key characteristics: (i) positive fundamentals (ii) cash generative (ii) a strong balance sheet (iii) an attractive valuation.
Fidelity Japan Trust PLC
Trust objective The investment objective of the Company is to achieve long term capital growth by investing predominantly in equities and their related securities of Japanese companies.
Manager’s investment approach Nicholas Price follows a ‘growth at reasonable price’ approach, utilising Fidelity’s extensive local and global research capability. He focuses on gathering information from multiple sources. A key pillar of Nicholas’ process is detecting signs of change: (i) change in fundamentals (ii) change in environment (iii) change in sentiment and (iv) change in valuations. He also maintains a strong sell discipline by naturally trimming outperformers and recycling into new ideas, retesting the mid-term growth thesis for signs of change and moving on if there are more attractive opportunities elsewhere.
Fidelity Asian Values PLC
Trust objective The investment objective of the Company is to achieve long term capital growth through investment principally in the stock markets of the Asian region (ex Japan).
Manager’s investment approach Nitin Bajaj is a contrarian value investor whose investment decisions are based on rigorous fundamental analysis, with a bottom-up stock selection approach primarily making use of Fidelity’s proprietary research resources. There are three guiding principles in his investment process: (i) Understand the business: the economic characteristics of a firm’s underlying franchise. (ii) Valuation: anomalies, or opportunities to buy a good business at attractive valuations. (iii) Awareness of high expectations: stay away from the latest market fads.
2 Index Name: MSCI CHINA (N).
3 Index Name: FTSE World Europe ex-UK Index Total Return.
4 Index Name: Tokyo Stock Exchange TOPIX Total Return Index.
5 Index Name: MSCI AC Asia ex Japan (N).
C
hina experienced a worse 2018 than many other global stock markets, with a longer and deeper correction hammering share prices by almost 25% over the year. This combined with an ongoing
economic slowdown could lead investors to wonder if China is a market to avoid for now. But a look behind the headline numbers reveals a powerful domestic consumption story which, when combined with rock bottom valuations, presents an attractive environment for stockpickers. One of these stockpickers is Dale Nicholls, manager of the £1.4bn Fidelity China Special Situations PLC. His strategy is to leverage Fidelity’s well-resourced analyst team in Asia to find opportunities across China that are not fully recognised by the market. In particular, he focuses on companies with strong brands, pricing power and good growth prospects. An effect of his unconstrained and research-focused approach is that his portfolio has a bias towards the small- and mid-cap names which tend to be overlooked by other investors. This strategy has helped drive the investment trust to top-quartile performance in its sector over both three and five years, according to FE data.
Local Chinese brands have started to move into more upmarket streetwear and have been able to command premium prices
Local brands on trend Strong brands are an important part of the domestic consumption theme, and an interesting shift is happening as local Chinese brands become more desirable, giving Western names like Nike, L’Oreal and Starbucks a run for their money. For example, local smartphone handset makers in China are competing successfully with Apple on spec and price: “That price/performance balance is shifting to the local players,” Nicholls says. Amongst sportswear brands, Nike and Adidas have a firm grip on the premium part of the market but, at a mass market level, local brands such as Li-Ning are coming through strongly. With a growing following among younger and ‘cooler’ Chinese consumers, Li-Ning has started to move into more upmarket streetwear and has been able to command premium prices: “These domestic brands are adept at managing their businesses and catering to the rapidly changing needs of the locals, and some of them are able to get pricing premium versus foreign brands,” he adds. Elsewhere, while Nicholls notes insurers have been hit hard by the downturn, he sees a compelling case for them in the long term as Chinese households become more affluent: “As people get richer it’s natural for them to want more protection,” the manager says. He predicts that savings and wealth management products and services insurers offer will also be increasingly in demand, and the penetration of these products across the Chinese market is much lower than in the West so there is room for growth. Valuations on insurers such as China Life and China Pacific Insurance (both held in the trust) are at such low levels that the share prices are actually factoring in businesses going into decline, which Nicholls argues is certainly not the case.
China gets richer The portfolio’s overarching theme is consumption, which Nicholls points out is the biggest driver of growth in China: “As the middle class develops, we’re seeing increasing ‘premiumisation’ which shouldn’t be a surprise as incomes rise,” he explains. “It is still the main theme I am backing as it is a pretty clear road forward in growth for the next 10 to 15 years.” Yet even Nicholls remains concerned about the impact of the slowing Chinese economy on domestic consumption. He concedes debt growth has been slowing at the margin and the US/China trade spat has weighed on sentiment. He notes the main impact has been on big-ticket consumer goods. The auto sector, for example, saw a 4% decline in 2018, its first negative year in two decades: “There is some slowdown on the consumption side, but if you look at things on an absolute basis you can see overall retail sales are still growing at a rate of high single digits, and consumption is still growing faster than overall GDP so, for me as a bottom-up stockpicker, it’s still a healthy environment”. However, importantly the portfolio is well insulated from the effects of trade tariffs on Chinese goods because of its minimal exposure to exporters – some 90% of the total revenues of the companies in the trust come from Greater China.
*Source: Fidelity. As at 31 March 2019 **Undiluted basis
Pre-IPO ideas Up to 10% of the portfolio can be in unlisted stocks, and Nicholls has used this to allocate to high growth opportunities including DiDi, a taxi service app that is China’s answer to Uber, ecommerce and sourcing platform Yiguo, and a global drone manufacturer. “There is a lot of pre-IPO activity in China. We added more names last year and at the same time we’ve had two listings from the portfolio so it is a constant process. It’s good to see those companies that can make that transition, and I think we will see more come to market this year.”
Gearing up Nicholls has the option to take short positions in the portfolio using contracts for difference and - a benefit of the investment trust structure - can also use gearing to take advantage of attractively priced stocks. Recently the trust’s net gearing has been moving up, reflecting Nicholls’ view that valuations on quality stocks look too low to resist following last year’s sell-off. At the macro level, he expects the Chinese government’s steps to shore up growth should provide support to a number of sectors, putting a floor under the slowdown. Combined with the strong structural trends in the country this means that, looking forward, China remains a fertile hunting ground for long-term investors, offering quality companies with huge potential at historically low valuations.
E
uropean companies are unlikely to see much in the way of earnings or share price growth this year following a tough 2018. That is the view of Sam Morse, the manager of a leading European equity
trust who describes himself as “a cautious chap with a gloomy outlook”. But it’s not all bad news. In fact, there are quality companies to be found in Europe at reasonable valuations, and many of those will be well placed to grow their dividends over the long term, creating shareholder value. Morse’s strategy, at the helm of the £1bn Fidelity European Values PLC, is to find those businesses and hold them for at least three to five years. “Companies that consistently grow their dividends do consistently outperform, the problem is identifying those companies,” he says. To find them, he scrutinises company fundamentals, including their growth drivers, how they use capital, whether they generate cash (a key indicator of future dividend growth), and the strength of their balance sheet. His emphasis on careful bottom-up stock selection and protecting investors’ capital means the portfolio is typically quite concentrated, with just 40-50 holdings in defensive-type stocks. The trust can be expected to lag its peers during rapidly rising markets, for example, during recovery years such as 2009 post-financial crisis and 2013 post-European debt crisis. In contrast, it tends to outperform when investors are selling: “When people go from being very optimistic to being quite gloomy, which is what we saw last year, this is an environment in which my funds tend to do well,” he explains. Morse prefers to remain fully invested even when prospects for European companies look muted, rather than trying to time the market. One of the other major factors which impacts portfolio performance is the direction of interest rates, because some of the dividend-paying stocks the trust holds - the ‘steady eddies’ – are bond proxies which behave more like fixed income. “Generally if bond yields rise quickly over a short period of time, the trust will tend to underperform,” Morse explained. However, he added rising bond yields could also be good for the portfolio long term, because it signals inflation is picking up, squeezing the margins of those companies which don’t have strong pricing power, and reducing their dividend payouts.
Sam Morse is currently avoiding the autos sector, even though it is an important part of the European market
Where next for Europe? Europe has been a tough macro environment over the last few years and the outlook remains challenging, with low economic growth, stagnant productivity, high debt levels and ongoing political risks. But European companies are much more plugged into the global economy, giving investors more reason to be optimistic, despite a trend of earnings downgrades. “European companies have actually delivered, in aggregate, very good returns, as good as global counterparts over the last 25 years,” says Morse, pointing to returns of about 9% a year since 1991, on a par with global returns. How have European companies been able to perform well despite the backdrop of a “political and economic basketcase”? The answer is dividend growth, helped by strong corporate governance, which has supported share prices. Morse believes those companies which can demonstrate consistent and rising dividends will outperform in the long run, so investors in the region should tune out the noise. “Investors should buy and hold for the long term and, whatever happens in the next year or two, I’m pretty confident that it will be rewarding for them to be investing in European companies on a longer-term view - as rewarding as it has been in the past.”
Current positioning Morse aims to keep the portfolio well diversified, but he is not averse to avoiding whole sectors if they do not meet his investment criteria. To this end, he often has an underweight exposure to financials, and is currently avoiding the autos sector, even though it is an important part of the European market, featuring big-name carmakers Daimler, BMW, Peugeot and Renault. Although their low P/Es look attractive, he fears they could be a value trap because, as mature, cyclical businesses, they are unlikely to see much dividend growth. In contrast, the area of the market where he is most overweight is technology, at 12.3% versus 6.3% for the benchmark, but he explains this is a function of stockpicking rather than a top-down call on the sector. “There are just a number of what I would consider to be very attractive software companies in Europe. These tend to be companies that achieve good returns on cash invested, have solid balance sheets, good structural growth, and that are quite cash-generative, so they very much fit the criteria I’m looking for,” says Morse. Tech names in the portfolio include Amadeus, ASML and SAP, while other key holdings for the trust include Nestle, Novo Nordisk in healthcare and luxury goods brand LVMH.
The short book The “mirror image” of the portfolio’s conviction in these cash-generative, stable businesses is its short book. Morse is able to take short positions on stocks with the opposite characteristics using derivatives such as contracts for difference, although these make up just a small portion of the trust. Not all the trades placed in the last 18 months have yet gone to plan, but he is not discouraged. “I haven’t abandoned it because I do think that, over time, we’ll be able to prove that this is just another source of outperformance for the investment trust relative to the benchmark.”
I
have a very simple philosophy which I apply when investing: buy good businesses, run by competent and honest people, and buy them at a price which leaves enough margin of safety for mistakes or bad luck.
As I’m trying to buy companies that other people aren’t looking at, this tends to lead me away from big index stocks and into less well known smaller and medium-sized companies. Looking at Fidelity Asian Values PLC, for example, mega-cap stocks comprise just 20% of the portfolio, compared to around 75% of the MSCI AC Asia ex Japan Index. With around 18,000 listed companies across Asia, the opportunity to find hidden gems is immense and it is among small-caps where I tend find more mispriced stocks, where valuations offer both downside protection as well as the potential for future upside as and when things improve.
With around 18,000 listed companies across Asia, the opportunity to find hidden gems is immense but time consuming
This is an aircraft leasing business, which I started buying before most investors were aware of it. Many airlines don’t own their planes but lease them for seven to 15 years. BOC Aviation is the sixth largest aircraft lessor in the world. Originally spun out of Singapore Airlines and then sold to Bank of China, 25% of the company was listed on the stock exchange in 2016. I started buying the stock when it was trading 1x price to book, 6x earnings and I was getting a 7% dividend yield at that time. The business has a real competitive advantage because it is owned by a bank and therefore able borrow money at very low rates. As luck would have it, other people started noticing it in a fairly short span of time and we were able to make a reasonable return on our investment.
Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC and the Fidelity Asian Smaller Companies Fund, discusses why sometimes simplicity is best when it comes to investing in Asia. He discusses his approach and how this plays out in his latest stock picks
Fidelity Asian Values PLC: Stockpicker insights
Photo by Mickey O’neil on Unsplash
A constant philosophy Finding good businesses is easier said than done. It requires an immense amount of hard work and patience from our analyst team because we look at company after company after company and it could be only one out of every 15 or 20 that meet our strict criteria. As political, economic and market events may continue to be unpredictable, I believe to be a successful investor you need a constant philosophy to which you stay true. In adopting this approach and combining it with a skilled team of analysts who are willing to work hard, we hope to continue to deliver superior returns for investors over the long-term.
BOC Aviation
This Chinese company has a c50% global market share in Monosodium Glutamate (MSG). It also produces other corn starches and animal feed additives, which is effectively a consumer staple in Asia. Fufeng Group is a very low cost producer. It is broadening its product offering and importantly, has a clean balance sheet. Despite these positive attributes, the stock is cheap for a global leader. It has been misunderstood by many investors, especially those outside Asia, who have missed the consolidation taking place in the market, meaning the company should see better pricing power and margins throughout the next cycle.
LIC Housing Finance is India’s second largest housing finance company with a real competitive advantage because of its low cost of borrowing (it has the highest credit rating in the space) and low cost of operations – it shares a distribution network with Life Insurance Corporation which is its parent company and India’s largest insurer. Its assets (mortgages) react to interest rates faster than the company’s liabilities, so throughout the falling rate environment over recent years, the company saw its Net Interest Margins shrink – putting many potential investors off. With rates now beginning to rise, this trend will reverse, so I have been able to buy a long-term compounding business at just 10x price-earnings. Each of these companies, though operating in very different markets, has potential for growth, but is protected by a real competitive advantage or barrier to entry – which is key to how I select businesses in which to invest.
Fufeng Group
LIC Housing Finance
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