214. Why infrastructure is crucial in the transition to net zero
Rebecca Myatt, a portfolio manager on the Elite Rated First Sentier Global Listed Infrastructure...
I don’t know about you, but it feels like my monthly wage just isn’t going as far as it used to. And there is a good reason why: the price of many goods and services are continuing to rise.
Inflation in the UK now stands at 5.4% – the highest level it has been since 1992. In the US it is even higher at 7%. Both business margins and consumer spending power around the globe are being squeezed.
While it is hard for consumers to do anything other than cut back on spending during times like this, some companies are in a better position than others to pass on their rising costs – they can increase their prices without their customers switching or abandoning their products.
Essentials like food, drugs, power and even insurance are at the top of the food chain when it comes to pricing power, as we need them no matter what. But it also applies to some companies with strong brands that engender brand loyalty.
And, as James Thomson, manager of Rathbone Global Opportunities, pointed out: “Recent surveys indicate many businesses plan to increase prices by significantly more than they plan to further raise wages, which should benefit those companies with pricing power. If these price rises stick and sales volumes remain robust, this could deliver some explosive earnings upside even though the journey toward them will be bumpy.”
Here, we highlight five funds that are investing in companies that have that all-important pricing power.
The managers of this fund take a long-term approach, focusing on quality, cash-generative businesses. They define quality companies as those with three characteristics: asset-light business models; high barriers to entry which can’t be disrupted easily; and finally, their customers’ decision to buy their product or service should not be determined completely by price. The team then selects stocks for the portfolio based on valuation and dividend yield. The top three holdings currently are Procter & Gamble, Wolters Kluwer and RELX*.
This fund focuses on structural growth businesses, which the managers believe can add value in the under-researched small and mid-cap part of the UK stock market. The process begins by filtering out FTSE 100 and investment companies. The managers then look for companies with following attributes: barriers to entry; a competitive advantage; revenue visibility; pricing power; sustainable growth; an adequate balance sheet and the ability to finance growth; incentivised management with a good track record; and takeover potential. The top three holdings are OSB Group, Accesso Technology and Atalaya Mining*.
The managers of this fund are conservative investors. They prefer to invest in real infrastructure assets with barriers to entry and pricing power. They believe that for infrastructure to deliver its full potential, other crucial requirements are management alignment, independent boards, appropriate gearing, transparent regulation and cultures that are working to sustain their license to operate. The top three holdings are Transurban, Nextera Energy and American Tower Corporation*.
This is a high conviction multi-cap strategy focused on finding reforming European businesses, which can create wealth and returns for shareholders. We like the longevity and experience of the two fund managers, who have been working on the strategy since 2001. They have proven that their process is repeatable: ignoring weaker businesses with poor corporate governance and instead focusing on five key attributes: aligned interests, earnings visibility, pricing power, cash generation and return on capital. They like organic growth and dislike big acquisitions. The top three holdings are Nestle, Linde and Novartis*.
The investment philosophy of this fund is based on the premise that a company’s intrinsic value is determined by its growth, returns on capital, sustainable competitive advantage, and pricing power. The manager develops a thorough understanding of the industry in which a firm operates, the competitive landscape it is facing and the actions it is taking to improve its positioning. He will sometimes invest in stocks without pricing power – but only if the firm is the lowest-cost producer in the industry. The three largest holdings in the fund are currently LVMH, Nestle and semiconductor company ASML*.
*Source: fund factsheet, 30 November 2021