Photo Rosaine Cousin
Rosaine Cousin

How does CM AM Global Leaders perform in this turbulent period?

Global Leaders (RC share) ended 2021 up 22.3%. The Fed's policy U turn, another deterioration in health at the end of the year and rising inflationary pressures make the market configuration complex. This is measured by the return of high volatility and the speed with which the sector rotation into sectors and asset values deemed to be discounted. For example, at 15 January, Global Leaders posted a drop of 6.1% while the World AC World, dividends reinvested, limited its decline to 1.8%. At this stage, the management makes some adjustments in favour of securities such as Volkswagen, Hilton hotels or a new position in BNP. Valuations are calculated on assumptions of lower growth and higher rates. However, we are not giving in to the siren call: start of year rallies are often deceptive and well purchased, growth stocks outperform over time due to their intrinsic qualities: secular growth, high profitability, return.

In this context, how do you position yourself?

CM AM Global Leaders is a thematic fund investing in leading companies with strong and responsible brands. Our selection offers very resilient revenue and EPS growth over time. As such, the 97% invested portfolio offers average sales and EPS growth of 11.5% and 17% over the next 12 months. The 2022 PE of 33X should be put in perspective: Returns are high and sustainable beyond 2022. However, some observers argue that global growth is already slowing. In China, retail sales were up a modest 1.7% and exports were flat due to port congestion. The Chinese central bank cut its key rate by 10 basis points. Meanwhile, the Fed is preparing its tightening and Joe Biden is entering the mid term campaign. Volatile trading can thus occur and appropriate stock selection will determine fund performance.

With inflation at record levels, particularly in the United States, how do leading companies remain a buoyant investment theme?

Wage inflation, the bottlenecks are with the Covid becoming the main fears of the US management teams. With producer and non energy consumer price indices up 8.3% and 5.5% in December versus 2021, respectively, companies fear the risk of margin erosion. Faced with this threat, our leaders have serious assets: Pricing power based on a strong brand, higher market share than its competitors, capacity for innovation and acquisition, geographical diversity and exceptional management.

Can you give some examples?

By way of illustration, Microsoft announced a 15% increase in subscription fees for Office 365 and Microsoft 365. This multi year increase that will drive revenue growth over several years, Microsoft (3.5%) can afford it because competition in this segment - mainly Google - is weak. They also maintained the appeal of the range with innovation: Teams, Power Apps, Power BI... Another example: Estée Lauder (1.8%): This cosmetics group has a gross margin of 76%: To offset an inflation of 10% of its production costs (24% of sales: Logistics, raw materials, direct wages) this requires a theoretical increase in selling prices of 2.4%. Over inflation is twice as much an effort as for a group with a gross margin of 50%, as is the case for larger public brands. But the distinctive fact is above all that, as for the majority of Estée Lauder's consumers, the price criterion is not the most important; this would be without a fall in volume. It adopts the same 'premiumisation' or upscale approach by gradually increasing the tariff for basic offers throughout the world.

You have mentioned the concept of 'responsible brands', is the ESG approach an integral part of your management process?

The investment process incorporates criteria to analyse the strength of the brand as well as the operational, financial and extra financial excellence of the company. We have just made a major change in the fund's management, incorporating an SRI approach. Because of containment, environmental and social challenges have taken an increasing place in consumer concerns. They expect marks to inform and set an example. By way of illustration, Nike, known for his commitment to the Black lives matter movement in the United States, decided last March to halt its direct cotton supply from the Xinjiang region. In defending the cause of the Uyghur minority in this way, the brand suffered a boycott campaign in China that weighed on its sales. Despite the short term impact, we think Nike brand is growing up with the consumer as its values are aligned with the company's ESG responsibility. Following the same logic, we sold Li Ning, Alibaba and Meituan this summer whose ESG momentum does not appear robust enough at this stage.

How do you find the 'leaders of the future'?

The central issue driving management is to ensure that every company whose stock is held in the portfolio remains precisely the leader in the future. The brand's ability to engage with the consumer as well as cash flow generation are key criteria.
In Brazil, we added to apparel retailer Lojas Renner, whose business model is based on that of Inditex. With over 65% of its energy mix derived from renewable sources, the group significantly reduces its carbon emissions and is stepping up its efforts in its supply chain: This makes its growth model more sustainable. The brand, which was highly appreciated by Brazilians (70% of digital transactions are completed on its application) will enable the company to return to organic sales growth of over 8% once the sanitary conditions have been met.

What are you looking for?

We look for leaders whose business model responds to various underlying growth dynamics. Microsoft, Adobe and Alphabet remain strong convictions as corporate digitalization accelerates worldwide and particularly in Europe. The payment stocks Visa and Paypal or Lojas Renner in Brazil mentioned above are at interesting levels and will benefit from the dissipation of the health crisis (shopping, travel, conferences, etc.). We are also looking for stocks with internal value creation catalysts: Richemont (1.7%) was increased at the expense of Kering (1.2%). After years of slow growth, jewellery accelerates. Richemont's iconic brands Van Cleef & Arpels and Cartier delivered. The announcement of a disposal, or a possible merger of the digital distribution division YNAP (Yoox Net A-Porter), reinforces the stock's appeal. Hilton (2.2%) leaves room for economic re opening. Confinement changed travel habits: As business clients reduce the frequency of their travel, they may also become more inclined to extend their on site visits in order to spend time with local teams. The Hilton group has a solid balance sheet, confidential brands and the willingness of some private owners to convert their property into management by the Hilton group.

Completed on 17/01/2021

Past performances offer no guarantee as to future performances. The reference to certain values is given for information purposes. It does not aim to promote direct investment in such instruments and does not constitute investment advice. The fund's portfolio may be modified at any time.