Investing in quality growth companies is a pretty basic concept: Stay hyperfocused on entities with good balance sheets, healthy free cash flow, and high and stable returns on equity. Like eating well and exercising, success is the product of consistency and discipline.
“Investing is often seen as some effort to uncover something magical,” says Matt Benkendorf, the chief investment officer of Vontobel Quality Growth and co-manager of the $368 million Virtus Vontobel Global Opportunities fund (NWWOX). “We look for what’s already there in front of our faces, and then see if we can understand why it’s there and if it can continue.”
Benkendorf, 42, has been honing that practice his entire career. He started straight out of college in 1999 in the back office at Vontobel Quality Growth, a $35 billion boutique arm of Vontobel Asset Management. He worked his way onto the trading desk, then into analyst and portfolio-manager positions. In late 2008, Benkendorf joined Rajiv Jain as co-manager of the global fund, which has returned an average of 12.5% a year over the past decade, better than 93% of its world large-stock peers.
When Jain left Vontobel in 2016 to start his own firm, Benkendorf promoted Hong Kong–based analyst Ramiz Chelat, 44, to join him at the helm. Over the past three years, the duo have navigated the fund to an average annual return of 15.2%, clearing its benchmark, the MSCI ACWI, and the category average by nearly four percentage points.
The global fund, whose A shares carry a 5.75% load, is a highly concentrated “all star” portfolio that brings together ideas from regional strategies managed by the 21-person quality growth team. But they don’t just pick out top holdings from sibling funds—they look for the best companies in their sectors, regardless of where they are in the world, and make sure they work well together in a single portfolio. “You can’t have a basketball team that’s all centers,” says Benkendorf.
As CIO, Benkendorf also makes sure his team works well together. He and the four analysts who work with him in Vontobel’s Fort Lauderdale, Fla., office typically start their day just as Chelat and his two Hong Kong colleagues are winding down. The rest of the team works out of Vontobel’s U.S. headquarters in New York, and everyone meets up on weekly video calls.
The fund has a lot of leeway on country weightings, which can be 20 percentage points above or below that of the benchmark. Roughly half of the global fund’s holdings are based in the U.S. The reason? “It’s such a ripe playing field for quality businesses,” Benkendorf says.
Still, most of the global fund’s roughly 50 holdings come into the portfolio after they make the cut for one of the regional portfolios. The team starts by screening respective regions for companies that score high on quality factors. The most promising names get handed over to sector analysts, who arrive at five-year growth and valuation targets. In the case of true quality growth companies, those numbers should move in sync year after year.
The success of these companies isn’t predicated on a major turnaround, technology breakthrough, or management makeover. “We want businesses that have a clean track record executing their current strategy,” says Benkendorf, whose team includes three former investigative journalists who research governance, accounting, hiring practices, and anything else that might upend an investment thesis.
Two companies that typify this approach are Visa (V) and Mastercard (MA), global payments juggernauts that collectively account for about 45% of global card-payment volume (excluding China, that number is 90%). The companies’ financials only get better as they get bigger.
Alibaba Group Holding (BABA) is another example of how a business’s growth can snowball. The team first bought shares in one of its regional strategies when the e-commerce company went public in 2014. They added Alibaba to the Global Opportunities fund in 2016, when concerns over the company’s transition from a PC-based platform to a mobile offering opened a door to buy shares around $60. Alibaba is now trading around $220. Since its New York initial public offering, the company has added more merchants, now at 11 million, to its platform, and nearly tripled its user base to 700 million.
While the market is closely watching how the coronavirus affects its earnings, Chelat doesn’t think the impact will be long-lasting. “E-commerce is one category that can do fairly well because people are consuming more in homes,” he says.
A company can be high-quality in the eyes of the Vontobel team even when the market thinks otherwise. A case in point is Johnson & Johnson (JNJ), which has been sitting under a cloud of class-action lawsuits related to its talcum powder—in addition to opioid-related litigation. Plaintiffs in the talcum cases claim the company knew its products were contaminated with carcinogenic asbestos, while the company has denied those allegations and has said there is no asbestos in its baby powder. The fund bought the stock in 2018.
Baby powder is only a sliver of J&J’s revenue. The team thinks the company’s free cash flow could exceed $20 billion this year, which is more than their conservative estimate of up to $7 billion for all outstanding talc-related legal costs. And J&J, along with the fund’s top holding, Microsoft (MSFT), are the only two U.S. companies with AAA credit ratings.
Bookmaker Flutter Entertainment (PDYPY), might also seem at odds with a quality-growth philosophy, but Benkendorf begs to differ. “It’s a phenomenal business that’s growing its bottom line in the double digits,” he says. The team added Flutter’s Dublin-based predecessor Paddy Power to the global fund in 2012; the company merged with British competitor Betfair in 2016 and later rebranded as Flutter. Online sports betting has long been legal in many countries, including Australia and in the United Kingdom, and it’s gaining traction in the U.S., where it’s legal in 20 states.
Online gambling offers enormous returns on invested capital because it requires very little net fixed assets—and the business model is durable, to say the least. “Gambling is one of the world’s oldest businesses,” Benkendorf says. “It feeds into human nature, which is pretty predictable.”
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