A professional investor tells us where he’d put his money. This week: James Harries of the Trojan Global Income Fund selects his favourites.
Events in Turkey remind investors that the political and economic backdrop can have a major impact on a market. Years of quantitative easing and near-zero interest rates have greatly reduced available income from core bond and credit markets, and prompted global investors to take greater risks farther afield, including emerging markets such as Turkey.
As global monetary policy becomes less accommodating and risk aversion rises, Turkey may prove to be the first of many emerging markets to see an exodus of foreign money. Central banks are trying to unwind the emergency measures they implemented after the financial crisis, but markets used to plentiful liquidity may struggle to adapt.
At Troy we tend to avoid businesses that are either highly influenced by the global economic backdrop or that have an intensive need for capital or borrowing to flourish. We favour financially productive businesses that can compound capital consistently to drive real dividend growth.
Despite the global market uncertainty, we see opportunities to invest in our favourite companies at the right price. We believe the job of an investor is to buy a stake in a business on a reasonable valuation whose earnings and dividends are likely to be materially higher in five, ten and 20 years’ time. The following three ideas fit the bill.
Scope to grow
Novartis (Zurich: NOVN) is a Swiss pharmaceutical group comprising innovative drugs, generics (Sandoz) and eye care (Alcon). It has already launched one of the most attractive sets of new drugs in the industry and has some potential blockbusters. Alcon is being spun-off to shareholders, which may bolster the share price, and Sandoz is a key producer of bio-similars, which promise to be a very valuable part of the generics industry. The newly appointed CEO, Vasant Narasimhan, should bring new vigour to the business. Novartis is a top-quality, well-financed business operating in an industry with strong demand. It is reasonably valued with a growing dividend, yielding an estimated 3.5%.
Beverages and snacks company PepsiCo (Nasdaq: PEP) is another example, with snacks driving most of its profits. You should invest in what tastes good and, despite “wellness” trends, the human propensity to snack is embedded in the human psyche. Small treats tend to be consumed habitually without much regard to price, enabling Pepsi brands to secure attractive returns on capital. The international business has scope to grow. The shares are reasonably valued and the dividend yield, currently an estimated 3.3%, is set to grow.
An underrated technology play
Leading networking infrastructure firm Cisco (Nasdaq: CSCO) is perceived as a low-growth tech incumbent owing to concerns about its technology becoming obsolete as computing moves to the “cloud”. But the consensus is wrong. Cisco products are becoming more relevant as network complexity increases. Its business quality is improving too as software sales become an ever-increasing part of total revenues. The shares are attractively valued with an estimated dividend yield just above 3%. Thanks to its conservative balance sheet and bright prospects, we expect steady dividend growth for years to come.