Musings of a Global Strategist on Conviction
Pramit Ghose
Pramit Ghose

With over 30 years’ investment experience, I have been running global equity income portfolios for nearly 20 years and work as part of a small, dedicated team. When a stock purchase works out well, we always sit down as a team to analyse how much skill or luck was involved.

A recent purchase of French technology consulting firm Cap Gemini, for the Global Equity Income fund/portfolio has worked out fantastically well. Cap Gemini is a company we know well, we have held it in our Global Equity Compounder fund/portfolio, and we like the business model of supporting companies to develop their digital and Artificial Intelligence applications. We had been carefully studying the company’s updates and broker research notes, and were convinced, that despite many of the uncertainties for 2019 that were prompting equity markets to fall in Q4 2018, the company’s 2019 outlook was reasonably good. So when the shares dropped in value by over 25% between November 2018 and early January 2019, we bought. It was the day after the Apple profit warning, and markets were lurching downwards again. We are managers of conviction and felt this was a very attractive opportunity to acquire Cap Gemini shares, which were trading at a 7-year low in terms of forward earnings.

Roll on a couple of months, and a combination of market recovery and a robust set of earnings and 2019 forecasts from the company in late January, meant that the shares had more or less recovered all of the losses since early November. A gain for our clients of over 30% in just two months. With valuations up to speed, we sold to bank the gain. This, in our view, was skill and conviction in action, not luck. This 30%-in-two-months gain in a large well-managed company is an unusual event for our longer-term strategies which are longer term. The key is to take the gain, briefly celebrate, move on and not to be complacent.

If one buys a stock at approximately £10 and its goes to around £60 over the following 15 years, more or less a “6-bagger” over this timeframe (a “9-bagger” with dividends, or almost 15% per annum in sterling), and it is a relatively large and resilient company, then one is likely to be quite fond of it. Throw in Reckitt Benckiser’s great set of consumer healthcare and hygiene brands such as Dettol, Harpic, Nurofen and Strepsils, and perhaps you might forgive me for being stubborn about retaining the stock in our Global Equity Income and Global Equity Compounder portfolios.

Despite Reckitt Benckiser’s great longer-term performance since March 2003, we should have sold the shares a couple of years ago at the stock’s all-time high.

There have been concerns about growth strategies, margin pressures, relatively poor revenue growth, and competitive pressures from rivals Henkel and Beiersdorf, in addition to concerns that the company’s 2017 large acquisition of baby milk specialist Mead Johnson was a step too far. These concerns have put pressure on the company’s share price and valuation ratings. There is no doubt we have been too stubborn about this holding. Reckitt Benckiser CEO Rakesh Kapoor’s quip that the company has helped the “Clean India” programme to build 75 million new toilets in India since 2014, and that these new toilets need Harpic and Dettol (cleanliness bolsters sales), is a simple and compelling message about the growth runway the company still has. During my experience of markets, I have seen some of my favourite long-term winners, such as Diageo, Unilever, Microsoft, Cisco and Johnson, go through 2 to 4 year periods of being “out of favour”, perhaps temporarily losing their way and being de-rated, only then to recalibrate themselves and become great stock market winners once again. So we have held onto Reckitt.

Looking back, to be honest, stubborn was wrong. We should have sold at peak valuations a couple of years ago.

For now, we’ll hold on. Hopefully, being stubborn today is the right decision with valuations currently at 5-year lows.

To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.

The objective of the Global Equity Income strategy is to invest in a diversified global portfolio of financially strong, well-managed companies that have a proven record in paying an attractive dividend. Our aim is to improve long-term risk-adjusted total equity returns while maintaining a balanced exposure to dividend yield, quality and growth. The objective of the Global Equity Compounder strategy is to actively invest in a diversified global portfolio of high quality companies that offer compounding attractive returns and lower volatility over time. Both are available as a UCIT fund with daily liquidity and as a discretionary share portfolio.

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.