Q&A: Veritas Global Fund
1) What is the underlying strategy of the Veritas Global Fund?
Our underlying strategy is the preservation and growth of capital over time by deploying capital with high conviction into the equity of between 25 & 40 ‘quality’ companies. The strategy seeks to deliver G7 CPI +6% over rolling 5 year periods, so is consequently unconstrained by reference to an index.
2) Could you explain one or two of the current investment themes?
We currently have three thematic filters – Scarcity & Supply Constraints, 2020 Rising Tide Industry Winners and Enduring Business Models. Taking them in turn, Scarcity & Supply Constraints means we are seeking to find companies that own an asset that is either irreplaceable or not financially viable to replace, this can be a tangible or intangible asset. This tends to achieve two things; firstly the company will be very difficult to compete with, and secondly it will have pricing power. Often these type of companies operate in an oligopoly industry, for example SES in the fixed satellite service industry or Safran in the area engine industry.
2020 Rising Tide Industry Winners is were we want the analysts to think about companies that are in an industry that they can guarantee will be bigger in 4 or 5 years time (Rising Tide) and then to think about those industries to identify companies that will be the industry winners of the future. These may not be the front-line names in the industry today, but they have the capability to become the industry leader. For example data, it is absolutely guaranteed that there will be more data produced in five years time than there is today, but who can benefit from that? One company we believe that can is Oracle through it’s provision of CRM systems to business and their need to capture more client data and be able to use this data efficiently to meet there business objectives. Enduring Business Models, we have spent sometime examining the best business models in the world and the companies that have them. One thing that strikes you about these companies is that their valuations, in our view, are rarely at an attractive entry price for us to be able to deliver on our return objective. However, by examining these models in great detail we can think about other companies, often in unrelated sectors, that have some of the characteristics of that outstanding model. Having the characteristics of an outstanding business model will help those companies to deliver on their revenues and earnings without the help of a certain political, policy or economic outcome which is at best unpredictable. We found examples is industries that at first one would not expect to find enduring business models, for example Aerospace (Safran & Rolls Royce) and Financials (the exchanges such as London Stock Exchange and payment networks such as Fiserv). Please note, not all ideas have to be part of, or come via, a theme. Most importantly we use themes purely as filters, they do not (and cannot in our view) pick stocks.
3) In what environments/conditions should we see good performance from the fund?
We define good performance as delivering on the G7 CPI+6% which we have done over every rolling five-year period since launch. The byproduct of that is that the majority of the time we also beat the MSCI over that timeframe, in fact the times when we don’t beat the MSCI are when markets rise rapidly, usually driven by some external factor such a policy induced liquidity. Our cautious approach means we tend to sell companies too early so don’t fully participate in these rapidly rising markets. Our record shows that in falling, sideways and modestly rising (circa up to 10% per annum) our approach fairs very well.
4) What challenges do global equity markets face going forward?
It is clear to many investors, Veritas included, that a lot of gains have been pulled forward from the future resulting in companies valuations being re-rated even when their earnings growth does not justify it. For example look at ‘Dependable Compounders’ most notably in North America. The likes of J&J, Colgate etc etc have all seen their multiples expand to a point way beyond what Veritas would pay to enter what are undeniably quality companies. Companies such as these have benefited from policy induced liquidity and the manipulation of other assets (artificial undervaluation of cash/over valuation of bonds), the longer the status quo persists the less levers policy makers/central bankers have to pull. We want to identify quality companies that can grow their earnings without the tailwind of a particular policy outcome and invest in them at a price that provides a margin of safety to preserve capital and grow it over a 4 to 5 year time horizon. Our expectation is that when we look back in five years time we will have seen global equities deliver an annualised mid single digit return, how that is achieved is unknown. The environment of modest returns tends to suit our approach well due to the high quality nature of our investments.
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