Morgan Stanley Global Brands

The investment team behind Morgan Stanley Global Brands have a mantra: ‘don’t lose money’, which will possibly be as comforting to investors as the familiar names that can be found in the portfolio. The team, which operates as a boutique within Morgan Stanley, looks for high quality companies with defendable and visible future earnings, allowing them to give attractive returns to shareholders and reinvest in their business to stay ahead.

Our opinion

The performance numbers of the fund speak for themselves. We really like the high level of concentration of this fund, which has only 25-30 holdings and more than half of its assets in the top ten names. It shows real conviction from the managers and is a good example of how active management can really add value.

Fund manager

Morgan Stanley Global Brands is run by a ten-strong team, headed up by William Lock. William heads up the London-based international equity team and joined Morgan Stanley in 1994. Prior to joining the firm, he worked at Credit Suisse First Boston's Corporate Finance Group, and was a management consultant with Arthur D. Little. William has a BA in modern history from Keble College, Oxford. There is an open and flat structure to the investment team, who are all London-based. Each member is assigned two or three sectors to cover, as each will have different ways of looking at stocks. They are free to analyse companies in their own way, but are conscious of the key characteristics the fund as a whole requires.

The secret to longevity in this business is continuing to ask the right questions. Encourage your team to question everything and everyone, including yourself!

William LockFund manager

Investment process

The fund is a very concentrated portfolio of high quality global companies. The criteria the team looks for to define a quality company are features such as intangibles assets - like strong network benefits and brands, or licenses and permits that can provide an advantage over competitors. They will also look for companies benefiting from economies of scale and leading market distribution.

The strategy is focused on generating absolute returns and not losing money through the team's stock choices. The process will start with a screen to identify those companies achieving high returns: defined by strong returns on capital, low leverage and low capital intensity. Also, every stock will have to yield at least 1% in order to show commitment to minority shareholders.

From this list, the managers will analyse whether the returns generated historically are sustainable going forward. They will need to see that the quality characteristics of the firm can be defended, and that the firm is in control of its own destiny. They will therefore analyse the threat of new entrants, and environmental and social factors.

The third step will be to confirm the investment story with company management teams. This is essential before an investment, as the team believes that the first thing that damages a business is the people. The team will also have conversations with other stakeholders and will look at the businesses strategy, not just quarterly earnings.

Once they have found investable companies, they will then assign each a valuation.

The resulting portfolio holds between 20 and 40, but the sweet spot will be around 25-30. These will primarily be media, consumer discretionary and health care services companies. High quality industrial companies will also feature, but need to demonstrate cyclical protection. The managers deliberately avoid banks, utility, telecommunications and energy companies, as they are not in control of their own destiny and rely on external factors.

Stocks are bought with a four year outlook, meaning turnover is around 25%, though positions will be topped and tailed, depending on their performance and attractiveness. While the fund can invest globally, it typically has the vast majority of its assets in developed. That said, holdings may still have considerable emerging market exposure due to their global business lines.

ESG

ESG - Integrated
This fund has a focus on quality and will consider ESG factors as part of this: the quality approach should lead to firms offering long-term compound growth and this can be easily undermined by ignoring ESG issues. Rather than screening the universe, ESG factors are used in the stock research, valuation and portfolio construction parts of the process. This work is carried out through a proprietary Material Risk Indicator system. This looks at universal risks such as carbon or executive pay, then at industry and company specific risks for more granular issue. Scores for ESG-related opportunities are then added, with firms whose product or services could be solutions to ESG challenges, allowing them to gain market share. This analysis culminates in a rank of A-E. The managers can use this score how they wish. This could be by reducing the position size, adjusting a valuation target or by avoiding the company altogether. This means that the manager will have the final say on what is and isn’t considered acceptable.

Risk

The managers define risk as the permanent loss of capital, and therefore assess the potential drivers behind this in the stock selection process. They will consider factors in a variety of categories, including the sustainability of the company’s strong position, the effects of technological disruption and sensitivity to the macroeconomic environment. They will also assess the impact of regulations on sectors and the risk of management making mistakes - hence the heavy focus on meeting teams during the process.
Positions are sized depending on how much conviction there is in the company with the portfolio split softly into three sectors. The top five holdings will need to have a lot of conviction and at good valuations, with position sizes over 5%. The next part of the portfolio will be sized around 3%, as the investment case is usually missing one key element - often an attractive valuation. The final sector will be the tail of positions around 1-2%. In total, the top ten names will make up over 50% of the portfolio.

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