Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tom Walker, fund manager, Martin Currie Global Portfolio Trust.
Conviction is a powerful word. It implies a certainty of belief and a firmly held opinion. How, though, in a global economy fraught with uncertainty and volatility, can we exercise such a definite sentiment when it comes to investing? Simple. Conviction in an investment case is built on research.
We use wide-reaching fundamental analysis to arrive at our view of a company’s business model, then compare what we expect returns to be with what the market expects. This allows us to find stocks that we believe will outperform the wider market – stocks with company-specific, positive change, and access to higher-growth niches, which we expect to do well over the longer term.
Our recent investment in web giant eBay (NYSE: EBAY) is a good example. We saw eBay as one of the best ways to invest in the long-term growth in e-commerce, and the move to electronic-based payment systems. The firm has turned around its ‘marketplace’ businesses over the past three years, and we expect transaction revenues to grow at least in line with overall growth in e-commerce.
The payments business, PayPal, is growing well, as card and web-based payments replace cash and cheques. eBay has a strong balance sheet, giving it the flexibility to engage in merger and acquisition activity, or to return cash to shareholders.
A thorough evidence-based approach doesn’t discriminate on sector or regional themes. Instead, we are looking for companies that we believe can generate alpha (returns over and above the wider market) at the individual stock level. That’s the case for another of our current holdings, insurer Prudential (LSE: PRU). From our research and contact with management, we believe that Prudential’s Asian business can double in size every three to five years. Crucially, higher earnings, solvency and book-value growth are translating into rising cash returns and dividends, as well as funding new business growth.
You always have to challenge and reassess your convictions. We hold French aerospace company Safran (Paris: SAF), which produced an encouraging set of numbers in the second quarter of 2013, but our faith in the investment case was boosted more recently by an investor day. Management set out how it believes revenue from spares for the A320 and Boeing 737 engines can double (from 2010 levels) by 2017 rather than 2020, as had previously been expected. The company also indicated that further investment in its next-generation engine, CFM LEAP, was on schedule.
US chemicals company LyondellBasell (NYSE: LYB) is another example of a stock we have held on to because we see further scope for outperformance. The company entered this year on the back of two strong quarters. But the market has also reacted well to the announcement of a special dividend and a share buy-back. We are impressed by the firm’s ability to generate cash and its willingness to share it with investors.
Political uncertainty in Europe, a looming credit squeeze in China and concerns over the possible ending of the US Federal Reserve’s monetary-stimulus programme mean volatility will stay high. But while we can do nothing to end this uncertainty, well-researched analysis does make it possible to pick stocks with conviction.
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