News: Stay focused on quality companies priced at a discount

  • Tom Wildgoose
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 9 - 15, 2017.


Investors should avoid making market calls and invest in a limited number of quality companies whose stocks are being traded below their intrinsic value, says Tom Wildgoose (picture), head of equity investment at Nomura Asset Management UK Ltd.

“This is a basic investment strategy, but it is what we are doing and what investors should be doing moving forward,” he points out.

“Making market calls has become increasingly difficult. This is especially due to the populist referendum and election that led to Brexit and Donald Trump being elected US president respectively. There will be other elections this year where the results are also hard to predict.” 

Wildgoose says the global stock markets have generally rebounded after Trump’s election because there is expected to be more spending under his leadership. However, it remains to be seen if he will introduce protectionist measures, which will dampen global trade and growth, he adds. 

In the face of all this uncertainty, Nomura Asset Management Malaysia Sdn Bhd has extended its Global High Conviction Fund to local sophisticated investors with a net worth of at least RM3 million from December last year. 

The wholesale fund feeds into its target fund, the Nomura Funds Ireland — Global High Conviction Fund, in which it invests up to 99.5% of its net asset value. Investors can invest a minimum of RM10,000 or US$5,000 and are subject to a 5% sales charge and an annual management fee of 1.4%.

Wildgoose, who manages the target fund, says it invests in a limited number of quality companies whose stock are trading 15% below their intrinsic value. The fund holds these stocks for the long term to realise their gains. “Over time, the markets will come to recognise their quality and prices will go up,” he notes.

The fund boosts its returns by only focusing on a small number of these companies, investing in 17 to 25 stocks globally compared with other funds, which invest in 40 to 50 stocks. Wildgoose says this allows the fund to capture the upside more efficiently instead of diluting returns by expanding its investment portfolio. “Our study shows that the chances for funds to outperform the benchmark diminish when they hold up to 40 stocks.”

He also says the fund’s volatility is only marginally higher than its peers with a larger investment portfolio. “We have done some studies to show that volatility can only be marginally reduced when a fund has more than 20 stocks in its portfolio.”

Wildgoose says the fund also looks globally for investment opportunities. For instance, it has invested in D.G. Khan Cement Co Ltd, which is listed on the Pakistan Stock Exchange.

“It is a cement manufacturing company. We are confident because Pakistan’s economy is doing quite well. The high inflation rate [that impacted the country’s economy previously] has come down somewhat. The risk of terrorism is there, but the situation has improved,” he says.

More importantly, the China-Pakistan Economic Corridor (CPEC), which is currently underway, will spur demand for cement. Based on its official website, the CPEC is a framework of regional connectivity to enhance geographical linkages between China and Pakistan. 

The framework aims to improve the road, rail and air transport system between both countries through several development projects. According to the website, there are currently four road and rail sector projects under the framework, which cost a total of US$7.84 billion. “There will be more consumption of cement and this will benefit the company,” says Wildgoose. 

Based on its fund fact sheet, the Nomura Funds Ireland — Global High Conviction Fund has generated returns of 22.24% and 4.7% in the past six and three months respectively. The fund, which was launched on Dec 21 2015, has 52.51% exposure in US equities, 28.13% in greater Europe equities (including the Middle East and Africa) and 8.77% in greater Asia equities (including Japan and Australia). Its top five holdings are PayPal Holdings Inc, Qualcomm Inc, The Priceline Group Inc, Fresenius SE & Co KGaA and eBay Inc, according to its fund fact sheet.