Up in smoke
The Global Franchise Fund is also awash with tobacco companies, with the top 10 holdings alone containing both the Imperial Tobacco Group (5.6%) and Japan Tobacco (5.5%).
Rossouw says the ethics of smoking do not factor into the fund’s investments; at the end of the day, it is down to an individual if they choose to smoke or not, and he believes it fulfils a quality of life for many people in the same way as sport and tourism do for others.
Instead, Rossouw’s tobacco investments are driven by the “responsible”, high-quality governance of firms that offer attractive cashflows and are often significantly mispriced.
As an example, he points out that Japan Tobacco is a cheap company that dominates the Japanese tobacco markets by offering the cheapest cigarettes per person while positively changing its pricing structures.
“The company also has a strong global footprint and is bought at a big discount to traditional tobacco stocks because, historically, the company has had lesser degrees of exemplary capital management.
“We saw some serious changes in terms of its holding structure and view towards capital allocation, and took a big position in the business.”
He adds that he is keeping an eye on Philip Morris International (PMI), another tobacco company, as a potential stock holding in the fund.
He says: “PMI has underperformed for three years now but it has a large, 60% emerging market exposure and has hit currency headwinds. When these stabilise and possibly reverse there could be considerable upside.”
Opportunity knocks
Despite holding steady stocks for long periods of time, Rossouw insists his management style cannot be described as “static”, and in fact lends itself to purchasing new opportunities, given the right circumstances.
“Just because there is a degree of consistency in what we do, it doesn’t mean we are static,” he says. “We would love to broaden our portfolio and there are a number of stocks we would like to own, which we do not at this point in time. But we know that market cycles, when they change, will give us opportunities to purchase those stocks.
“It is rare we find things that are better than what we own, and we are not going to tinker to add diversification to our portfolio just to generate turnover for the sake of seeming like we are doing something.”
