Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Michael Clements, portfolio manager, Franklin European Growth Fund.
The European stockmarket has so far remained fairly stagnant this year thanks to threats ranging from trouble in some EU nations down to the spectre of inflation.
In this type of environment, investors can benefit by being highly selective in their approach and focusing on those companies that will prosper over the long term, no matter what happens to the economy. We like firms that have a strong competitive advantage and which generate substantial amounts of free cash flow. They typically also have pricing power – an important trait in an environment where the ability to pass on cost increases in raw materials often differentiates the winners from the losers. Here are three good examples.
The core of Experian’s (LSE: EXPN) business is selling credit information to financial institutions around the world to help them make better lending decisions. It has data on over 500 million people and 40 million companies in more than 16 different countries. It is prohibitively expensive for a new entrant to replicate the scale, as well as the technology advantages, that Experian boasts. So competition is limited to a handful of companies. Given that banks, in particular, are increasingly focused on understanding their customers better to mitigate risks in their loan portfolio, the future looks bright. Increasingly, Experian has branched out to selling credit information directly to consumers and has also used its database to help marketing departments of companies that target specific groups.
Our second selection is Dignity (LSE: DTY). It is the UK’s second-largest provider of funeral services and the market leader in cremation services. Last year the company carried out 64,000 funerals and 45,000 cremations. By its nature, Dignity is a very stable business. But thanks to limited capital investment needs and a product where good service rather than price is the most important consideration for clients, it generates a substantial amount of cash flow. Last year the firm used this to pay investors a £64m special dividend.
Dignity is a good example of a company that is largely unrelated to the macroeconomic problems elsewhere in Europe, has a simple business model and executes its strategy extremely well. It has been a stable presence in many local communities for many years, and we expect that it will go from strength to strength over the next decade.
Founded in 1821 as a printer and manufacturer of stationery, De La Rue (LSE: DLAR) printed its first banknote in 1860 for the government of Mauritius and today prints the currency for over 150 countries around the world as well as passports, driving licences, identity cards and tax labels. The barriers to entry in this industry are high as the security technology needed to stay ahead of counterfeiters is very specialised and governments generally prefer to deal with tried and tested partners.
De La Rue was recently the target of a bid from its French rival, Oberthur. Recognising the strength of the company’s franchise, it tried to take advantage of a depressed share price. That bid was ultimately unsuccessful, but it does highlight the real value in De La Rue’s assets.