Q: Would you provide an overview of the history and the mission of the fund?
The Oppenheimer Global Fund exists since December 22, 1969. In these almost 50 years, the fund has had a long-term economic compounding philosophy and a thematic approach to investing. We look for companies that benefit from large global trends, which are shaping the world economy over decades. We hold these companies to create value over a number of years.
Q: Which part of the globe do you primarily focus on?
We are a truly global fund and we find opportunities in the U.S, the developed and the emerging markets. Overall, the portfolio is driven by companies that are best positioned to take advantage of global growth. While 25% of the revenues of the portfolio come from emerging markets, only about 10% of the portfolio’s holdings come from emerging markets. So our holdings can be locally domiciled or can be large multinationals such as a Louis Vuitton or Kering, which sell luxury goods and receive a substantial part of their revenues from Chinese consumers.
When I invest, I think about the economics of each company, not about where the company is listed. Typically, we have more mid and large-cap holdings than small-cap names.
Q: What core beliefs guide your investment philosophy?
Our philosophy is to invest in growth companies at the right price. I can be incredibly patient and wait for the right opportunity to buy the companies that I find attractive when the price matches the opportunity set.
For decades the strategy has been based on a long-term perspective on economic forces and themes that are monetized by the companies over a long period of time. That idea will continue to drive the strategy going forward.
Price and valuation are extremely important. As a rule of thumb, we aim for a 50% upside in three years and doubling in five years, or for about 15% annual return. The longer-term outlook is an important part of the philosophy, as well as the economic rationale. It is the movement of the economy that drives our portfolio.
Q: How do you apply your thematic approach to investing?
When investing globally, we believe that the best way to create a portfolio is by looking at the totality of the opportunity. For instance, some of the best luxury goods companies are based in Europe, while some of the best technology companies are based in the U.S. or Asia. Some of the best factory automation companies are based in Japan. I don’t want to limit myself geographically when searching for opportunities for the strategy. With the thematic approach, we invest in the companies that are able to take advantage of large trends.
There are three steps in selecting an investment with the thematic approach. The first step is identifying these large trends. We use the term “Mantra” for Mass Affluence, New Technology, Restructuring, and Aging, or trends that go on for 10, 20, 30, or 40 years.
Once we have identified the underlying trends, we look at the industries that are best able to capture and take advantage of these trends. For example, hardware was the way to monetize on technology in the 1980s; then the opportunity moved to software and now it’s moving to cloud computing. In another example, as the world continues to grow in wealth, the people who get wealthier begin to travel more and to buy luxury goods that show not only success, but also a brand identity and a statement.
The third step is to identify the individual companies that are best positioned and can move faster due to their management and due to the way the market evolves. For example, a company like Airbus Group SE is a duopoly driven by the trend that people are traveling more and more. Even in 2017 global travel growth increased from the typical range of 5% to 6% to about 7%.
Airbus is more of a pure play in the commercial aircraft industry. It used to be controlled by European governments, but after a change in the shareholder structure, it developed a more commercial focus. Its development pipeline has improved and has become less risky. With an outlook of eight to 10 years, it is an idea that perfectly matches our goal to hold a company for a long period of time.
Another example is Louis Vuitton in the industry of luxury goods. The company has been able to monetize in handbags, jewelry, and ready-to-wear apparel over the years. Ready-to-wear has more variability, because its margin and top line depend on fashion trends, but the handbag market provides recurring revenues with its evergreen items that are fashionable throughout time. That allows for a more stable and profitable business, while Louis Vuitton continues to make investments in new products in addition to its core group of evergreen items.
The company controls all the distribution for the Louis Vuitton brand and the inventory that goes into the network. That feature allows better access, but creates challenges from a top line standpoint, because it can’t go to every door or store in the world. It is a more expensive approach to distribution, but the company is willing to invest to have more sustainable earnings over a longer period of time. I can see the brand creating value for decades.
These are the type of managements that we like to find. Again, we start with a very large theme that goes on for decades, then we find an industry that monetizes it, and then we find a company within that industry that is best capable to capture the opportunity.
Typically, an operationally strong company tends to have strong financials and profitability. When Airbus rolls out new aircraft programs, its earnings may get depressed in the short term, but the company has a large growth opportunity with the industry and the economy going forward. Louis Vuitton now has a global business and has been able to capture more customers each year as global wealth increases.
Q: What is your investment process?
At the security selection level, our process is bottom up and driven from a return/risk perspective. Because of our longer-term outlook, we are actually partnering with the companies we buy for five to ten years, so we focus on the sustainability of their business and economics, how that translates into financials and how they handle capital allocation.
The largest holding right now is Alphabet Inc., the parent of search engine operator Google, at about 6% of the portfolio. It is attractive because of the quality and the sustainability of its earnings, the economic rationale behind them and the investments in new areas. Because of its computer science organization, Alphabet is well positioned as the world increasingly uses computer science and data to solve new problems. Their earnings are sustainable over a long period of time. That’s the main driver at the security level, combined with the economics and the price that we pay for it.
Q: Could you illustrate your research process with some examples?
A good example would be Industria de Diseño Textil, S.A. or Inditex, the fashion retailer that owns Zara. We became interested in the company after it simplified the ownership structure of the stores and the selling process. Now Inditex is bringing fashion to the consumer much quicker than ever before. The underlying trend is that as the world continues to gain wealth, we see an increase in the purchases of fashion and apparel.
One of the challenges in the industry is to write a big order nine months ahead of time, have it all come from Asia and have the right merchandize that’s just on trend. Inditex actually makes a great part of its products closer to Spain, and doesn’t put in large orders. Instead, it waits to see what sells best in its stores and to get feedback from the store managers who want to replenish the best selling items. The entire distribution goes through the headquarters in Spain and that’s an advantage.
Inditex has a radio frequency identification system, which says exactly what inventory is in stores or within the supply chain. It has a holistic view of inventory and is able to be effective in fulfilling orders. The company does a great job of inventory management, sending it all through one central location to everywhere in the world. It is able to get the right items to the consumer at the right time and to avoid excess inventory of unpopular products. The company has developed from a Spanish business to a global opportunity and continues to grow online and in terms of store count.
Another example is Nidec Corporation, the Japanese manufacturer of electric motors. The company is poised for significant future growth because of the electrification of the automobile industry. It invented and developed the brushless motor technology, which is part of a trend that can continue over the next five, 10 or 30 years. Nidec is incredibly well positioned to see a substantial increase in the value of its products.
We’ve owned the name for more than a decade and it is still a great opportunity. Right now we see a company with well-positioned technology and a management team that shares that vision and is capable of executing and tapping into the available value.
For me, the next opportunity could come from anywhere and it depends on the market. I think that autonomous driving and car electrification are great trends, but if the market doesn’t offer opportunities to invest in those areas at the right price, I may find the next opportunity somewhere else. I don’t dictate where the opportunity comes from; I wait for the price that I am willing to pay.
Q: What is your portfolio construction process?
I am trying to find the 70 to 80 best ideas within the global stock market. The portfolio isn’t focused on a benchmark; it is built with an absolute return mentality. Typically, we have holdings in technology, healthcare, industrials, consumer discretionary and even financials, but we don’t own commodities, energy, telecoms or utilities. The reason is our style of investing in large themes and in the ability to create value.
The construction of the portfolio is driven by the return characteristics of each name and how the economic risks fit into the total portfolio. For example, after the Brexit vote we owned Prudential Plc, a UK insurer. The company had a relatively small operation in the UK and received almost 80% of its value from its U.S. and Asian operations. After the Brexit vote, the U.K. pound fell 10% versus the dollar and most currencies. The market was nervous about anything related to the UK, so Prudential stock fell 6% to 8% the day after the Brexit vote. That didn’t make any sense from an economic standpoint. It actually created a buying opportunity, because the market was focusing on the listing, not the economics of the company.
The portfolio is geographically diversified, but that diversification is driven by opportunities, not by seeking certain exposure to specific markets. The location of the headquarters is often irrelevant, because the large multinational corporations have economic exposure in various parts of the world. For example, we own UBS and Credit Suisse, but a big part of their economic exposure is outside of Switzerland. The stated benchmark is the MSCI All Country World Index.
When we evaluate opportunities, we consider not only the business, but also the management, because we are partnering with them for many years. The fund has different holding period, which allows to compound value. The average turnover has historically been around 10% and we have names that have owned for over a decade. Because we own a different set of companies in the portfolio, the combination allows for differentiated returns over time.
Q: Do you hedge your currency exposure?
No, I don’t. The portfolio typically has a number of companies with operations throughout the world. For each company, we consider where the currencies are today, what the opportunities are, and we aim to understand the risk. For example, Airbus has large cost base in euro and sells in dollars. If there are dramatic changes to the euro in any direction, they would affect Airbus. I am conscious of that exposure, but I don’t hedge because there is enough opportunity in the names at the current levels.
Q: How do you define and manage risk?
It really comes down to the economic risk that I see for the companies and how they are positioned to deal with it. Then there are operational and financial risks. The operational risk is related to how well the management team is able to execute a strategy, while the economic risk is driven by the world economy.
We manage the risks through investing in companies that are positioned to do well and have management teams that I have confidence in. They should have strong balance sheets and strong operations from a financial risk standpoint. In terms of economic risk, we invest in companies that are exposed to trends that can limit the downside and improve the upside.
When I think about the portfolio in total, I think about the individual companies, their aggregate economic exposure and understanding what those exposures are for the portfolio.
