Companies with intellectual property are exactly what Denham likes. Pharmaceutical firms are a prime example of this. Patents protect the profitability of the business and the company regularly reinvests in future drug development.
“We like Shire and Fresenius, which is a diversified German healthcare conglomerate. We also like Bayer for the same reason,” he says.
Technology firms operate on the same basis. “I like a lot of software businesses. Historically, I have favoured SAP and Temenos Group. They have high margins and are very stable, plus they reinvest in upgrading and developing their products.
In the past, he has also favoured food and beverage companies with high profitability, such as Unilever and Nestlé, catering companies such as Sodexo or industrial-service companies.
With these firms in his sights, Denham says he will not be chasing more cyclical stocks and is likely to remain underweight in commodities, financials and industrials.
Tipping the scales
According to Denham, the fund is currently underweight in a lot of defensive sectors that have done well in recent years due to low interest rates, including consumer staples, utilities and real estate.
Though the Carmignac fund currently holds big stakes in Unilever and Nestlé, Denham does not consider this to be disproportionately high exposure to the consumer staples sector.
He says: “These are still good businesses. In the next three or five years we should see they will be good investments. However, in the next 12 months or so, I would not be earmarking the sector as an area that is going to add alpha to the funds.”
Among the consumer sectors Denham prefers are media companies. “We like WPP, the advertising agency. It scores extremely well on the bottom-up process of high sustainable profitability and reinvesting. It reinvests about a third of its profits in acquisitions or bolt-on acquisitions to grow the business, as well as internal development.”
The French communications and technical services group Spie has also caught his eye. He says: “It is linked to economic activity, which we like, plus it has all the characteristics of high profitability and high return on capital. It is also reinvesting by making acquisitions.”
Denham also favours budget airline Ryanair. “It always outperforms the competition and is attractive to new airports throughout Europe, even though it is an established player. It has continued to expand, expecting passenger growth of 8% per annum over the next few years.”
Waiting game
The Carmignac Grande Europe fund currently has a strong tilt towards the UK, with about a 30% weighting, though Denham says this is largely the outcome of a bottom-up stock selection approach.
“In the normal course of events, I would pick the stocks I like and the country weighting just comes out of the mix.”
He notes that the fund’s holdings of UK firms is often more due to their international focus. “The bulk of the exposure we have to the UK are companies, like WPP or Shire, who have big proportion of sales and profits internationally. Their businesses are not dependent so much on the UK economy. “
However, he feels geographical weighting could change when it come to the UK’s implementation of Brexit in the next few years.
“In prime minister May’s recent speech we learned more about what approach the UK is going to take in forthcoming negotiations, including being free to negotiate trade deals independently with non-EU countries, while having some form of free trade agreements with EU countries. However, there is a long way to go yet.
“It’s wait and see as to whether this strategy will be successful. The economic data in the UK has been OK since Brexit but it’s too early to conclude that the whole thing isn’t going to affect the economy.”
