Tell us about the investment process you use for this fund.
The investment process incorporates criteria to analyse a brand's strength and the company's operational and financial excellence. Starbucks, for instance, which was added to the portfolio in March, enjoys a remarkably high brand loyalty rate. Half of customers' purchases are made using the Starbucks loyalty card and 40% of customers in the US will go to another Starbucks outlet if their usual one is closed. This gives Starbucks a considerable edge in the highly-competitive QSR (quick-service restaurant) category. Financially, this has translated into gross margin of 70%, sales growth of 10% and earnings growth of 20% in the past decade. Starbucks' expansion in emerging markets, mainly in China, secures future growth beyond the current year, which will be marked by the Covid-19 pandemic.
How do you unearth the "leaders of tomorrow"?
The core issue in our investment decisions is making sure that every company held in the portfolio continues to have the markings of a future leader. A brand's ability to engage with the consumer and the company's generation and use of cash are key criteria. A brand that suddenly cuts the engines that drive its development (e.g. innovation, advertising and talent) will undermine its future position, as we have seen with Coty or Kraft-Heinz. We take a holistic approach in order to identify "future leaders". This involves analysing the quantitative data (brand rankings, financial screening) and the qualitative data compiled from meetings with professionals in the industry and senior management teams. Staying in the coffee category - which is growing by 5% a year - we invested in JDE Peets when it launched its IPO. Its Californian coffee brand - Peets - which is extremely popular with young people, and its L'Or coffee pods (which are both recyclable and compatible with Nespresso machines) give consumers what they are now looking for in terms of authenticity and environmental impact. The share is trading at a hefty discount to Nestlé, which is why we have included it in our category of "turnaround" brands.
How is CM-CIC Global Leaders faring at this chaotic time?
The fund (C shares) was up by 5.4% at 30 October, which represents a 10.1% outperformance relative to the benchmark index, the MSCI AC World, dividends reinvested, in euros.
How do you explain that?
CM-CIC Global Leaders is a thematic fund that invests in companies with strong brands. That means it is very sensitive to consumption (10% consumer staples, 29.6% consumer discretionary). Paradoxically, this has worked in our favour, as we had been keeping a very close eye on the consumption dynamics in China, which enabled us to quickly grasp the magnitude of the situation. In early February, we therefore decided to scale back our positions in luxury brands (Kering, Moncler) and sports brands (Puma, Adidas). This meant that when Covid-19 evolved into a pandemic, the fund was less sensitive to cyclical stocks (Michelin, Volkswagen). We were able to re-invest in stocks whose valuations were beginning to disconnect from the fundamentals as the markets plunged. Microsoft, Procter & Gamble and Roche are good examples. Their balance sheets are solid and their underlying growth trends and margins are intact.
What changes are you seeing in the current context that might have an impact on your investment universe and the construction of the portfolio?
Lockdown measures and massive liquidity injections have gone some way towards resolving the public health and financial crises. We are taking advantage of the rebound (+30% from the lows registered on the MSCI AC World Index) to trim some positions. The economic crisis is only just beginning. This has prompted us to sell American Express in favour of Visa and PayPal, which are more global and more digital, with strong cash flows. In markets that are stabilising, stock selection will be key to the fund's performance. We are also on the look-out for leaders whose business models are in sync with various underlying dynamics.
Can you give a few examples?
The lockdown is speeding up consumer use of digital content. We have therefore added Nintendo to the portfolio, to shore up our positions in Netflix and Tal Education. Its video game Animal Crossing has exceeded expectations (22.4 million units sold since March 2020) and the market is underestimating the additional profitable growth that its new gaming console will fuel, at a time when the Switch is still out of stock. We also took advantage of market concerns over Danaher's debt, triggered by the GE Biopharma acquisition, by investing in this high-quality life sciences and environmental stock. Its "razor and blades" business model, in which it sells equipment that generates 70% in additional recurring revenue in the form of services and consumables, keeps margins high. Under the leadership of an impressive management team, the company boasts an impressive cash generation profile. Lastly, the climbing stocks we have invested in include the Lululemon sports brand, which is a big hit with young people who practice yoga, an underdeveloped segment at behemoths Nike and Adidas. Lululemon derives more than 28% of its sales from digital retail channels, which makes it less reliant on in-store sales and therefore very profitable.