Scout Global Equity Fund Interview by Holmes Osborne, CFA
Looking at the Scout Global Equity Fund's holdings, you will notice several reoccurring themes--yearly rising revenues and earnings, high profit margins, low debt, and nice dividend yields. The funds seasoned managers scour the globe for companies that meet the profile of what they call the Three M's: management, moat, and market share.
Co-lead portfolio manager Jim Moffett has been with UMB since 1979 and formerly ran the Scout International Fund. Moffett delivers the economic theme for the team. He feels that developed economies have ..."been too dependent upon monetary policy and that has been a drag around the world". Deficit hawks have been too afraid to spend money. All this obsession with what the Fed is doing is a bad thing".
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"This is a sloppy time in the political cycle. Regardless of who wins, as we get closer to the election, the market will adjust to whomever is winning. I've seen that around the world, even when a socialist is elected in France the market goes up. The markets are happy when the election is over".
Scout Global Equity Fund - Global Economic outlook
Moffett challenged the assumption that China was going to, "buy ever last bushel, barrel, or ton of raw material" before the big drop in commodities. "When a bubble bursts, it stays burst. That takes care of China and energy". The fund eschews China, owns very little oil and gas, and no mining. As for Japan, Moffett has been impressed how companies have been improving return on equity. He sees an upcoming election in Italy as making things more business friendly and good for the economy. Moffett also feels that our neighbors to the north, Canada, have an underappreciated economy, which takes us to our first investment.
Scout Global Equity Fund - Portfolio Holdings
Alimentation Couche-Tard is a Quebecois headquartered company with 15,000 gas stations around the globe. In the U.S., the company is the number one gas station operator and goes under the Circle K banner. Co-lead manager Jim Reed points out that Couche-Tard has been one of the best at acquisitions in the business. It also has a 23¢ per gallon margin in gas, which is about double the profit margin of other gas stations. Co-portfolio manager Charles John points out that the company has what the team considers a "lenses of change". The mom and pop convenience stores are getting priced out which gives a large operator like Couche-Tard a big advantage. They also have high profit margins in food and beverage in their stores. Convenience stores are changing from the dirty, dimly lit places of old into mega-stores, which portends good things for Couche-Tard.
The next company is Kao, what Reed refers to as "the Proctor & Gamble of Japan". Earnings have been growing at 18%, dividends at 6%, and return on equity is an outstanding 15%, very high for a Japanese company. Back to the Three M's: the moat is the strength of brands, diaper share is 39% of Japan, and management is"...solid operators who have come up through the system". Kao has an excellent foot print in China too.
On Munich RE, "...well run, good market share, excellent moat. I see negative interest rates as an enemy but not a permanent feature of the landscape." On Buffett selling shares and his comments on the reinsurance industry, the team thinks that low interest rates and low catastrophic losses will probably lessen earning for the next five years but Munich will do fine.
Charles John is the technology expert of the team. He is bullish on semiconductor manufacturer Avago, "Hock Tan has been one of the most underrated CEOs in the U.S. Tan has been a stellar capital allocator...and does not enter commodity businesses. He enters niche businesses." John brought up FBAR filters, a niche technology that came out of Hewlett Packard that Avago has 85% to 90% share of the market. They dominate and have pricing power in the industries they enter. The company will earn more than $16 a share over the next two years and the stock is trading at $153, according to John.
Avago was such a successful holding that the fund cut back its position so it would not be too much of the portfolio. No Valeants here! Most holdings are between 0.5% to 2% of total holdings. Another similarity is that in all of the fund holdings, shareholders are not diluted with excessive secondary offerings. Net debt to EBITDA must be less than four times to meet the screen.
McDonald's is another holding. The breakfast concept is paying off and the stock is reasonably priced. Charles pointed out that he was at a trendy burger restaurant with his family and doubted whether it would be around in five years. McDonalds has staying power.
The Scout Global Equity Fund has been around five years and averaged 7.37% since June, 2011. It has outperformed its benchmark, the MSCI World Index. Assets are low but are sure to grow with the longer track record and good performance. The International Fund had billions in assets at its height and that is what the team is trying to build the Global Fund into. It's a very good, global blue chip fund that could be a core holding for the mutual fund investor.