Staying close to companies across the globe

QUESTIONIt has been an eventful six months for WAM Global (ASX: WGB). Can you talk us through the WAM Global Investment process?

CATRIONA BURNSThe investment process centres around finding undervalued growth companies from around the world. When we are finding companies we are focused on businesses that have strong industry positions, high quality management teams, sustainable earnings growth potential and compelling valuations, but we only buy when we can find a catalyst that we think will drive the share price higher and that could be such things as earnings beat potential, potential asset investments or exciting merger and acquisition (M&A) potential. We think at the moment given the volatility, it is more crucial than ever that we stick at all times to our investment process and we are certainly focused at all times on doing that.

NICK HEALYWhat is really important to our investment process as well is staying very close to our companies. We think it is particularly important in these uncertain markets where things are changing relatively rapidly. With that mind, the team travelled to Europe in September, we saw over 100 companies, had some really insightful conversations and this week I’m with Catriona in California. We visited the LA Basin and the Bay Area and again it is really important to have these conversations with managements of companies we hold and of potential investments.

QUESTIONCan you share some insights from your recent travels?

CATRIONA BURNSWe are seeing regional divergence as we look around the world. Europe in particular has been very much affected by rising energy prices and when we talk to corporates there is a significant amount of focus on how they are managing through those rising energy prices depending on the sector, particularly in manufacturing for example. The consumer is also being hit.  A lost of purchasing power is natural given how much energy prices have risen, so it really depends on the sector.  If you are in manufacturing, if you are in consumer related sectors, you have been affected.  We think that there are a number of businesses though that are actually managing through the current operating environment very well such as businesses exposed to travel and to entertainment are still benefiting from the bounce back from COVID. When you turn to the US, it is again quite a mixed picture. We have seen areas like housing and consumer goods be hit by rising interest rates whereas companies in areas like healthcare are still seeing very strong demand and the outlook looks very favourable.  Amongst technology companies, at the margin you are starting to see job cuts particularly amongst those unprofitable tech companies that have very much have funding requirements.

NICK HEALYOne example that brings home the value of the travel and meeting companies is it is not always about meeting our holding companies, it is also valuable to meet competitors of companies we hold.  We hold ICON (NASDAQ: ICLR) who outsource clinical trial work and on this trip we met a number of CEOs of competing companies and asked them how they viewed the demand environment, how operations were progressing and generally received a very strong, very positive view from them on the state of the world.  We also asked about the ICON and PRA merger, which in their view was handled very well without disruption and this is a highly valuable conversation to have and it is often these channel checks which add value on travel.

QUESTIONWhat are you seeing in global equity markets right now? How have you adjusted the investment portfolio amongst recent heightened volatility?

NICK HEALYWithout a doubt, 2022 has been a period of heightened market volatility.  The primary driver is multidecade high inflation which has resulted in a Central Bank response to take interest rates up.  We see this playing out in two ways.  When interest rates go up we do expect valuations to be impacted and to a decent extent we have seen that occurring across the market.  The other channel is earnings impacts.  We think we are earlier in the journey here.  We are starting to see some impacts but we expect that to be an increasingly common thematic talked about as we go forward.  On a granular level, it has been a very hard operating environment for companies.  We have seen supply chain disruptions, China’s COVID zero policy, rising cost of inflation across various categories, so a very hard environment to operate through.  Our view is that the best companies and the best management teams are able to differentiate themselves in these environments.  They are able to rise to the challenge and these are the kind of companies we want to be invested behind in these uncertain times.

CATRIONA BURNSIn times like this it is extremely important to stay close to the companies that we are invested in, to speak to their customers, their competitors, their suppliers because the operating environment is very dynamic at the moment.  In terms of portfolio changes that we’ve made earlier in the year as rates began to rise, we reduced our exposure to companies in areas such as the housing sector, to consumer goods and increased our exposure to businesses that we thought would be well placed to handle the volatility potentially ahead. These are businesses such as Deutsche Boerse (ETR: DB1), the largest European equities and derivatives exchange operator, Intercontinental Exchange (NYSE: ICE) in the US which had been unduly sold off in our mind on the basis of a small business that they are exposed to.  We also increased exposure to businesses such as AJ Gallagher (NYSE: AJG) and Booz Allen Hamilton (NYSE: BAZ) which we think have relatively resilient earnings profiles in the face of whatever economic environment is ahead.  Overall, we think the portfolio is comprised of high quality businesses that are well placed as we look ahead and we think they are significantly undervalued.

QUESTIONWhat are some of the themes that the portfolio is exposed to at this moment?

CATRIONA BURNSThe WAM Global portfolio is exposed to a number of themes that we think will be enduring regardless of the economic backdrop. One of these themes is health and wellness. COVID has only increased our focus on our health and wellbeing. Demographics is certainly a tailwind here. The World Health Organisation (WHO) estimates that one-in-six people will be over the age of 60 by 2030 and the healthcare sector in general tends to be relatively macro resilient, so regardless of the economy turning down, these companies tend to do well. A number of companies in the portfolio are exposed to this scene including Thermo Fisher Scientific (NYSE: TMO) and ICON. Both these businesses are very much pick and shovel businesses that are well placed to benefit regardless of which modality does well, which drug is approved. A second thematic that the portfolio is exposed to is infrastructure underbuild. This is extremely interesting because in the last two years there has been three significant pieces of legislation that have been passed that are very much a tailwind here. You don’t have to spend much time in the US to know that a lot of the infrastructure is ageing. We have seen rolling blackouts in places like California and there is a significant amount of spend that needs to go on. Companies in the portfolio that are exposed to this thematic include Quanta Services (NYSE: PWR) which is a best in class specialist contractor. We think they will do very well out of both the tailwinds from this legislation and just the enduring investment that is required.

NICK HEALYA third theme we are very well invested behind is data and analytics.  In terms of sectors, this tends to fall in two areas business information services and diversified financials.  Some of the companies we hold that are invested behind this theme include Deutsche Boerse and ICE, our exchanges, and AJ Gallagher.  We really like this thematic for three major reasons.  The first is each of these companies is the clear leader in the niche they operate in and we have selected them carefully to be in very attractive industry structures either duopolies or oligopolies, particularly important in uncertain economic times. These businesses demonstrate really high margins, really high returns and great cash conversion that we think will make their earnings resilient as we look into next year and the year after and thirdly, we think in the long term the importance of data to the clients of these companies is only increasing in terms of how they operate their businesses.  These companies all have fantastic data assets and we think the value of those data assets only increases through time. We think those are fantastic reasons to be well invested behind this theme of data and analytics.

QUESTIONHow are you seeing the world and the fund today?

CATRIONA BURNSThis is significant volatility in markets and uncertainty about the path for economic growth, but the companies that we have invested in the WAM Global portfolio we think are very well placed to weather whatever economic storms are ahead. We think they have extremely strong industry positions. They have very high quality management teams and we think they are significantly undervalued. In terms of the portfolio, we are very pleased that we have over 40¢ in the profit reserve, which is nearly four years of dividends and we would like to thank shareholders for their support in what is volatile times.