In the Financial Times, this coming weekend, I’m running a short Adventurous column based on a recent interview with Rajiv Jain, of Florida based fund EM equities manager GQG. I’ve long meant to talk to Rajiv, not least because two big UK generalist UK investment trusts – Alliance Trust and Witan – feature him as their SOLE emerging markets equity fund manager. You can see why they are so enthusiastic about him when you consider how he built up the EM fund management franchise at his old shop, Swiss owned Vontobell – AuM increased from $400m to over $50 billion. I’ll stay away from the main thrust of the FT article in this blog – the article will be available on Saturday in the great pink one – but I will dwell a little on a core fear expressed by Rajiv about quality consumer stocks in both the developed and developing world: familiar names such as Unilever, Reckitt Benckiser and Diageo.
I freely admit that I’ve been wrong about these stocks. When they were trading in their low to mid-teens in terms of PE ratios I thought they were fair value whereas current valuations suggest that they were in fact bargain. The locally listed versions of these global majors were also once trading at 15 times earnings – now they’re at 40 times profits. Jain freely admits he bought them when they were at these low valuations but now thinks prices are crazy. He now thinks that these EM stocks are a one-way trade which will “hurt a lot of people”.
It’s worth following his logic for a moment. Mr Jain suggests that in many of the domestic emerging markets he tracks for his fund, he can’t help but notice the success of Unilever and Gilette brands. But he also notes that in constant currency terms volume growth has ground to a halt. Put simply they’re not selling a great many more of their consumer brands. His core worry is that they charge too much and have been chasing margin rather than building consumer trust. Now though they are under attack – from two directions. The first is from domestic consumer brand champions who are eating into their margins. The second threat is from the internet. Rajiv’s concern, here is what consumers choose to spend their hard-earnt money on – expensive brand names or new internet services? His sense is the latter not the former. In these circumstances, the big consumer brand name giants are in the direct line of fire.
Mr Jain’s direct focus is on the big locally listed consumer businesses in developing markets but my sense is that these concerns are also valid in the developed world as well. I worry that these huge outfits – popular with so many investors’s – are looking horribly vulnerable to a new consumer paradigm: embattled consumers looking to save money to fund their increased broadband and streaming costs. Why spend money on expensive brand names?
One final note back in listed funds land. As evidence that my caution usually amounts to zero actionable investment ideas (!) I cite news yesterday that Triple Point has succeeded in getting away its Social Housing REIT on the specialist funds market. The fund hit its target of £200m with trading due to start at 100p today, Tuesday.
Congrats are in order to the Triple Point team!
Clearly, the market for a well-run fund targeting a 5% yield from supported living assets was much bigger than I thought…in early August of all times!
Crucially Numis reports that the fund already has a seed portfolio – five Supported Housing assets bought from Pantechnicon Capital, a company within the Triple Point Group, at a purchase price of £17.9m, equal to a 6% Net Initial Yield. Numis reports that the “Seed Portfolio properties are located predominantly in and around town and city centres in the Midlands and the North of England and are leased to Inclusion Housing CIC as Approved Provider for an initial term of 20 years, extendable to up to 60 years. The Seed Portfolio has been independently valued at £18.46m by Jones Lang LaSalle (on a portfolio purchase basis). The company will have target gearing of 40% of gross assets, with a maximum of 50% at the time of investment (typically at an asset level)”.
This successful new listing brings the total number of IPOs in 2017 YtD to 16 according to Numis, up from a low of six in 2016 when investor sentiment was hit by uncertainty over the Brexit vote – many of these funds have been focused on specialist property and income. However Numis also reports that several of these Property fund IPOs have failed to reach their target size, notably AEW UK Long Lease REIT (£80.55m versus a target of £150m); LXI REIT (£138m vs £200m); Residential Secure Income (£180m vs £300m); and Supermarket Income REIT (£100m vs £200m).