Global Titans Fund Commentary
After fifteen months of equity markets grinding steadily higher, volatility returned abruptly at the beginning of February. The selloff was triggered by a pick-up in US wages, which added to existing concerns about rising government bond yields, potential global inflationary pressures and the direction of monetary policy under new Fed leadership. Global equity markets fell sharply but swiftly recovered much of the early losses. The lower Australian dollar offset some of the weakness in the equity markets resulting in the benchmark returns ending only slightly down for the month.
The Fund’s unit price increased by 1.19%, after the cost of protection, in February. The performance was driven by positive contributions from our holdings in Cognizant Tech Solutions, Zoetis, eBay and S&P Global. The main negative contributors were Reckitt Benckiser, Paypal, Biogen and Heineken.
The Fund continues to have no foreign currency hedging in place as Insync consider the main risks to the Australian dollar to be on the downside. Insync continues to utilise index put options to buffer sharp falls in equity markets.
A content and analytics powerhouse benefitting from a number of secular trends
S&P is the largest credit rating agency globally (by 2016 revenue). Outside of the ratings business, S&P possesses a collection of excellent businesses including a dominant index franchise (S&P 500, Dow Jones), market data subscription services (Capital IQ), market intelligence (Platts), and commodity pricing (SNL Financial).
The credit ratings business is a great business that are a “must have” for new debt issuance. Investors rely on ratings from the likes of S&P to assess the credit worthiness of the borrower. Without a credit rating, the issuer will be forced to pay a higher interest rate. This enables ratings agencies to have pricing power.
Ratings revenue continues to rise and has a long runway of growth available to it. The largest is increasing disintermediation of finance in the developing world which we consider to be a megatrend. Continuing a trend that began decades ago in the developed world, companies are not relying on banks for financing but are accessing public debt markets instead. As emerging economies become more sophisticated, we would expect the volume of debt issuance, and the market for ratings businesses, to increase. A good example is the opening up of China and India. S&P have a 60% share of India’s leading credit rating agency. Adding to the positive growth outlook is the significant debt maturity schedules indicating that over $2 trillion a year in debt will need to be refinanced on an annual basis over the next few years.
Like its ratings business, S&P’s non-ratings businesses are asset-light, highly scalable, deliver recurring revenues and exhibit strong pricing power. In the index and market data businesses our research shows a long run way of growth with areas such as ESG gaining momentum, and the increasing demand for information and analysis (both data and tools) in the asset management and various corporate industries.
In addition to investing in highly profitable business with a long run way of growth, Insync also seeks to identify companies with a disciplined capital allocation framework. S&P Global have a clearly articulated framework that provides confidence that management can sustain the high current levels pf profitability and generate consistent growth in earnings. Because of the asset light nature of the business model and high free cash flow generation share buybacks and dividends are expected to represent at least 75% of annual free cash flow. Our proprietary long term valuation model shows the company continues to be undervalued.
While the information contained in this report has been prepared with all reasonable care, Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”) accepts no responsibility or liability for any errors or omissions or misstatements however caused. This is general securities information only and is not intended to constitute a securities recommendation. This information does not take into account your personal investment objectives, particular needs or financial situation. Applications can be made by reading the Insync Global Titans Fund Product Disclosure Statement (PDS) and then completing the associated application form. Both documents can be found on Insync’s website at http://www.insyncfm.com.au under the ‘How To Apply’ tab, or by contacting Insync on +61 2 8094 1255. Potential investors should consider the PDS before deciding whether to invest, or continue to invest, in the Fund. Past performance is not an indicator of future performance.