David Dudding on corporate competitive advantage
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
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During the turbulent market conditions of the last couple of years, investors have needed a steady source of returns and diversification more than ever before. For many, the rapidly changing market conditions have made global equity vehicles particularly attractive.
IN THIS EDITION
For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients).
IMPORTANT INFORMATION
In this Focus guide, David Dudding, manager of the Threadneedle Global Focus Fund, discusses the advantages of going global, the industries that have thrived despite the global pandemic, and the dominant themes in the fund. Having recently celebrated its three-year anniversary in the UK – the strategy has a longer track record as a SICAV – the vehicle is supported by a strong global team and a bottom-up approach that aims to pick the global companies most likely to thrive across all market conditions.
Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk.
Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UK UCITS scheme.
This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English only and may be obtained free of charge on request from Columbia Threadneedle Investments at PO Box 10033, Chelmsford, Essex CM99 2AL and from www.columbiathreadneedle.com Please note that the outperformance target may not be attained. Please refer to the Fund Objective in the appendix for further information regarding the Funds benchmark. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, Cannon Place, 78 Cannon Street London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
Tom Moulds and My-Linh Ngo on impact-aligned debt investing
Can debt investors promote positive change in the world by investing in the expanding ‘sunrise’ industries of a sustainable future rather than the ‘sunset’ industries of our past? If so, where would this approach sit in the ever-broadening spectrum of sustainable investing strategies?
In this Focus, My-Linh Ngo, BlueBay’s Head of ESG Investment, and Tom Moulds, a senior portfolio manager, tell us how they came to design BlueBay’s first impact-aligned debt strategy. The world is in a race against time, and Ngo thinks that an impact-aligned stance could speed up our transition to a low-carbon, more socially responsible society.
This is a marketing communication. There are several risks associated with investing in this product. Please refer to the prospectus of the fund and to the KIID available on this website before making any final investment decisions.
Investment Risk - The value of investments can fall as well as rise and investors might not get back the sum originally invested. Currency Risk - Where investments are in assets that are denominated in multiple currencies, or currencies other than your own, changes in exchange rates may affect the value of the investments. Effect of Portfolio Concentration - The Fund has a concentrated portfolio (holds a limited number of investments and/or has a restricted investment universe) and if one or more of these investments declines or is otherwise affected, it may have a pronounced effect on the fund’s value. Derivatives for EPM / Hedging - The investment policy of the fund allows it to invest in derivatives for the purposes of reducing risk or minimising the cost of transactions. Volatility Risk - The fund may exhibit significant price volatility.
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the interview
Finding competitive advantage in a global landscape
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In many ways, the Threadneedle Global Focus Fund is a quality fund. Around 70%-80% of the vehicle is invested in companies that the team believe exhibit high returns, low levels of gearing and debt, and earnings stability, even during recessions. However, Dudding and his team have something up their sleeve that traditional quality funds lack. The remaining portion of the fund can be invested in companies that are improving and on their way to becoming quality companies.
Competitive advantage
competitive advantage within their industry. Yet over the past 18 months, the macro backdrop has had an impact on even the most bottom-up of strategies, as the coronavirus pandemic ravaged whole industries and left the global economy on its knees.
s a bottom-up stock picker, David Dudding, manager of the Threadneedle Global Focus Fund, pays little attention to the macro events and themes in global markets. His fund is all about identifying strong franchises that boast a
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Different parts of the world are better at different things
The Threadneedle Global Focus Fund, however, managed to weather much of this storm as a result of its natural bias towards businesses that have thrived in the context of the pandemic. Though Dudding is quick to emphasise that the vehicle is by no means a thematic investment, themes have materialised from the stock picking efforts of the team.
Many of these, including e-commerce, digital payments and cloud computing, for example, emerged as winners during the pandemic. Similarly, the fund has a natural bias towards less commoditised industries and currently* holds no car makers, no airlines and no oil & gas companies, which puts it on the front foot when it comes to Environmental, Social and Governance (ESG) concerns - an issue of increasing importance to the fund’s investors.
The global equities team look at each company’s ‘economic moats’, a framework that evaluates the sources of competitive advantage, whether it be intangible assets; network effects; scale; switching costs; and/or cost advantage.
They combine this with Michael Porter’s classic Five Forces – factors ranging from the threat of new entrants to the power of suppliers/customers – to evaluate the durability of a company’s competitive advantage, helping them to identify those companies that can maintain strong fundamentals and that can compound growth over the medium to long term.
The global nature of the fund allows Dudding and his team to create a more diversified product, despite the vehicle being relatively concentrated with typically between 30 and 50 holdings. Dudding describes this as a “one-stop-shop” for investors who don’t wish to pick best of breed regional or sector funds.
Global advantage
Underpinning this is the expertise of Columbia Threadneedle’s wider analyst team, which feeds into the idea generating process for the vehicle. This is particularly helpful, since some industries require more local knowledge than others, one example being banks. This is a key area where the fund differentiates itself from quality peers, particularly within emerging market financials, which can demonstrate a strong competitive advantage in their respective markets.
Dudding adds that “different parts of the world are better at different things”. For example, he prefers luxury goods and consumer staples in Europe, while he thinks the best IT opportunities are to be found in the US.
However, Dudding generally avoids sectors that are domestically focused, such as utilities and telcos, and instead prefers bigger multinationals that can export globally. This explains the fund’s overweight to the US, since many large players are listed there, even though their revenues come from elsewhere – often from emerging markets. This global reach allows Dudding and his team to find businesses that they believe will thrive across all market conditions, increasing the chance of delivering a steady, reliable return to investors.
But that’s a lot easier to claim when investing in, say, the equity of a risky start-up, than when investing in the liquid debt of a more mature company through the secondary debt markets – even though sustainable ventures may need both forms of capital during their life-cycle in order to thrive.(1)
Public debt markets need to help companies that are actively promoting sustainability to scale up
Finding
competitive
THE INTERVIEW
advantage
their investment strategies, it is not difficult to list why. Over the past decade businesses, individuals and most importantly consumers, have woken up to the fact they can make a monumental difference to the planet if their investment strategy is well tuned to key sustainable risks like climate change and social inequality.
hen it comes to the reasons behind pension funds increasingly seeking to include environmental factors in
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Source: 1: Bloomberg and Columbia Threadneedle Investments EMEA APAC as at 18 May 2021
1
Key social outcome areas of focus
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Tammie Tang, director, fixed income portfolio manager, Columbia Threadneedle Investments
Sustainable Bonds
Tammie Tang and Moira Gorman, Columbia Threadneedle Investments
DELIVERING SUSTAINABLE GOALS
A net zero-targeted case study
Decarbonising portfolios
Dudding says the team strives to invest in companies that are deemed to be among the better performers on ESG metrics, or on their way to becoming such.
“It fits very nicely with our philosophy, because in some ways everything we are looking at is about sustainability of returns,” he says. “You can’t get this if you are cutting corners from a governance and especially from an environmental point of view, because these are business risks that will return to get you into trouble.”
Dudding explains that the network effect is in his view the best competitive advantage, which leads the team to invest heavily in internet and software companies.
Dudding says: “As a straightforward quality fund, you’d be less likely to own a bank, because they are very leveraged, or biotech, for example, because they don’t make any money. So it precludes quite a lot. Rather than being pure quality investors, we would say we spend more of our time looking at stocks with a competitive advantage.”
This two-pronged framework for assessing competitive advantage means the fund can be much more diversified than a traditional quality vehicle, as the team is able to look for returns in areas that quality funds would naturally discount.
The key, however, is that the company must be improving, whether that be in terms of traditional quality metrics, or on the ESG front.
It fits very nicely with our philosophy, because in some ways everything we are looking at is about sustainability of returns
*As of September 2021.
in a global landscape
The data lake captures more than 300 million unique financial and non-financial data points for over ten thousand issuers
Threadneedle Global Focus Fund
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snapshot
For UK Professional Investors only
A best ideas global equity fund that aims to outperform the MSCI ACWI index over rolling five-year periods by investing in quality stocks which have durable competitive advantages alongside robust business models.
Global research capabilities drive differentiated stock holdings
Key facts
FUND SECTOR
IA Global
MSCI ACWI Index, but manager can deviate from index significantly
BENCHMARK
17 April 2018
LAUNCH DATE
David Dudding
FUND MANAGER
30-50
number of holdings
How do we identify a company’s edge?
A best ideas global equity fund that aims to outperform the MSCI ACWI index over rolling five-year periods by investing in quality stocks which have durable competitive advantages alongside robust business models. The global equities team uses a framework that thoroughly evaluates the source of a company’s competitive advantage. This helps to identify those companies that can maintain strong fundamentals and that can compound growth over the medium to long term.
Actively managed, concentrated portfolio, quality focus
FUND TYPE
Source: Columbia Threadneedle as at 31 August 2021. The fund characteristics described above are internal guidelines (rather than limits and controls). They do not form part of the fund’s objective and policy and are subject to change without notice in the future.
Key factors
A quality approach focusing on companies with competitive advantages that are able to sustainably grow faster than the market
Naturally gravitates towards companies with strong ESG characteristics
Source: Columbia Threadneedle Investments. Morningstar, Michael Porter
Industry structure
• Qualitative assessment of source and sustainability • Looking for companies where it is established and / or improving • 20 to 30% of candidates will be in ‘improvers’ • All holdings display at least one
• Use Porter’s 5 Forces to assess competitive intensity • Preference for consolidated / consolidating industries • Competition and growth potential • Impact of regulation, technology, ESG
Performance: Cumulative returns since launch
Source: Morningstar, net of fees, in GBP based on GB00BF0Q8K85 share class as at 31 August 2021. The Fund launched 17 April 2018.
Past performance is not a guide to future performance. Capital at risk.
Source: Columbia Threadneedle Investments, as at 31 August 2021. Benchmark is the MSCI AC World Index. Cash position of 1.4% not shown.
Current positioning
Our goals and frameworks
COMPETITIVE ADVANTAGE
Intangible assets Brands or patents act as barrier to entry
Network effect Value grows as more people use it
Cost advantage Lowest-cost producer
Effcient scale One or two dominant companies
Switching costs Costs incurred through change
Porter’s 5 forces
Threat of new entrants
Threat of substitutes
Power of customers
Power of suppliers
Industry rivalry
Fund (net)
MSCI ACWI (gross)
IA Global (median)
5.5%
14%
3.5%
7.6%
68%
12%
13.2%
2.9%
5.8%
62.4%
3.6%
Regional weighting
Sector weighting
Information Technology
Emerging Markets
Europe ex UK
Far East ex Japan
Japan
North America
United Kingdom
Health Care
Communication Services
Consumer Discretionary
Industrials
Financials
Materials
Consumer Staples
Energy
Real Estate
Utilities
43.2%
22.7%
16.3%
11.8%
12.1%
9.4%
11.1%
12.2%
6.1%
9.7%
14.1%
1.9%
4.9%
1.8%
6.8%
0%
3.1%
2.7%
Fund
Index
To find out more about the Threadneedle Global Focus Fund visit columbiathreadneedle.co.uk/globalfocus
The global equities team uses a framework that thoroughly evaluates the source of a company’s competitive advantage. This helps to identify those companies that can maintain strong fundamentals and that can compound growth over the medium to long term.
• Qualitative assessment of source and sustainability • Looking for companies where it is established and • 20 to 30% of candidates will be in ‘improvers’ • All holdings display at least one
Threadneedle
Global Focus
David Dudding, portfolio manager
The interview
Fund snapshot
Fund Q&A
We are even more convinced that areas such as e-commerce and digital payments are going to work in the long run
“We are looking to outperform the market, but we would rather do it in small steps”
But it’s not huge returns we are looking for, it’s consistency and downside protection. We are looking to outperform the market, but we would rather do it in small steps, rather than a return profile where we outperform by a huge amount in one year because of some lucky punches and give a bit back the next year.
When I was running a European strategy, we used to say we run a “get rich slow” fund. It was about trying to find long-term sustainable compounders. With the global fund, maybe we are trying to get rich a little bit more quickly, because there is more growth in other parts of the world than there is in Europe.
What are the key goals of the Threadneedle Global Focus Fund?
Although we are predominantly a quality investor, we can look at areas that pure quality fund managers won’t look at, and that means we can aim for outperformance from many different areas, for example in technology and financials. And it’s all backed by the fact that we have a very large and strong research team across the globe, which makes it easier to join the dots together.
Apart from that, we haven’t changed very much as a result of the pandemic. Many of the themes got accelerated by the pandemic, and we think these trends are going to be there for a while.
We are investing in a lot of big internet names and they obviously have regulatory risks. Companies like Facebook and Amazon and Alphabet. We find it easier to mitigate these risks when we have fewer names and we know more about them.
Explore BlueBay’s unique approach to integrating ESG with My-Linh Ngo and Lucy Byrne
Our data science approach is something that we see relatively few other sustainable investors do, as yet
FUND Q&A
q&A
What makes the fund stand out from other quality growth-oriented global equity funds?
As well as competitive advantage, what are the other key things you look for in a company?
We also look for companies with improving competitive positioning - there’s no use buying a company with great advantages if their situation is getting worse, as this will impact future returns.
Has the shape of the portfolio changed as a result of the pandemic?
There are always good ideas coming into the fund, but the overall shape looks very similar now to how it did 18 months ago. We are even more convinced that areas such as e-commerce and digital payments are going to work in the long run, even as economies re-open. We remain overweight technology and healthcare, though our US overweight did go down slightly.
We have become more nervous about China, particularly about government intervention. But we didn’t have too much exposure there in the first place. Some of this is just changing exposures from some of the big Chinese internet names to Asian semi-conductors, for example.
What are the key risks associated with your strategy and how do you manage them?
Valuations are definitely expensive. There is a lot of stock-specific risk, as it’s a concentrated fund of 30-50 stocks and things can and do go wrong.
Although we are predominantly a quality investor, we can look at areas that pure quality fund managers won’t look at
How big a potential problem is that regulatory risk?
The regulatory risk does loom large for us, as we are overweight some of the US internet names and tech companies. But we think a lot of these concerns are in the price and that these are great businesses that would be much more expensive were it not for the regulatory overhang.
We always try to understand what risks we are running and that we are comfortable with them – and we always expect the unexpected!
How has the pandemic impacted your way of working – will remote working permanently affect your style of collaboration?
We’ve been surprised at how well it’s worked and how easy it’s been to collaborate, but we do recognise that you can’t beat face-to-face.
You can manage for a surprisingly long time by meeting businesses online, but I think it’s harder to form longer-term relationships with businesses, and each other, if you’re not doing it face-to-face.
So I think it’s great that we are going to be returning to the office but also great that we have discovered that we can be much more flexible, and working from home definitely has a place as well. It’s going to be a question of establishing a happy medium.
David is a senior portfolio manager within the Global Equities team. He is the lead portfolio manager of the Global Focus Strategy and deputy of the European Select Strategy. He joined the company as an equity research analyst in 1999, moving on to manage the European Smaller Companies strategy for 10 years until December 2012. David previously worked for John Swire and Sons in Hong Kong and for Investors Chronicle as a financial journalist. He holds a Modern History degree and a European Politics Masters degree from Oxford University. He also holds the Chartered Financial Analyst designation and is a member of the CFA Society of the UK.
David Dudding, senior portfolio manager
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It’s not huge returns we are looking for, it’s consistency and downside protection
The key goal is to outperform across multiple market environments with the performance driven by differentiated and genuine stock selection, rather than by investing style. We’re relatively style neutral from a traditional style sense – some slight tilts occur around our valuation discipline and the form of quality that we look for in stocks.
What is the key goal of the Royal London Global Equity Select Fund?
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Our Life Cycle framework helps when we are stock picking
