Strategies
Active Fundamental Equity
Global Franchise Equity Income Strategy
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Global Franchise Equity Income Strategy |
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Strategies
Active Fundamental Equity
Global Franchise Equity Income Strategy
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Global Franchise Equity Income Strategy
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The team believes that a portfolio of high-quality companies, whose primary competitive advantage is supported by dominant, hard-to-replicate intangible assets, has the potential to generate attractive long-term returns. In the team’s view, this involves investing in companies that can potentially compound shareholder wealth at a superior rate over the long term, while offering a measure of downside protection. The team’s research shows that these high quality companies, or compounders, which exhibit characteristics such as strong franchise durability, high and recurring cash flow generation, pricing power, low capital intensity and minimal financial leverage, have generated strong long-term returns in both inflationary and deflationary environments.
The team believes that the strategy offers “income, the right way.” Many dividend strategies may seek to offer higher dividends but to the potential detriment of long-term compounding of capital. The Global Franchise Equity Income strategy’s high-quality bias offers a more robust approach to income generation. Rather than optimising the portfolio to ensure it pays out high dividends, the team focuses on the underlying company fundamentals and free cash flows, which in turn means dividends are more likely to be sustainable and growing. The companies the strategy invests in make a high return on capital and are capital light; this means that they can afford to pay out, and keep paying out, dividends to shareholders. This is high quality income.
An Attractive and Conservative Extension of a Proven Strategy |
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Offers clients access to the established Global Franchise investment process and strategy – with its 20 year track record of successful investing in high-quality companies – plus an enhanced income profile. |
Quality Income with Capital Appreciation and Downside Protection |
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The high-quality bias in stock selection means that companies are more likely to generate sustainable free cash flows which in turn means dividends are more likely to be robust. |
Optimizing the Dividend Yield |
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The conservative overwriting strategy is straight forward and dynamic, allowing investors to retain maximum exposure to high conviction equity positions and not suffer the cash drag typically associated with some option strategies. |
| 1 | Screening the Universe |
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Companies with a free float market capitalization greater than $2 billion are screened based on financial metrics that the team believes are associated with strong franchise businesses. The key financial characteristic these companies possess is a sustainable, high unlevered ROOCE, which is generated by a combination of recurring revenues, high gross margins and low capital intensity. This helps support strong free cash flow generation which must be either reinvested at similarly high returns or distributed to shareholders. |
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| 2 | Security selection |
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The team looks for high-quality businesses with the following characteristics:
Through company visits and meeting management, the team monitors signs of franchise abuse, including failing to reinvest capital in high ROOCE businesses, preventing compounding by retaining excessive cash, and earnings-per-share6targets having precedence over ROOCE, which reward short-sighted behaviour. When assessing valuation, the team uses free cash flow yields rather than reported earnings ratios as their primary valuation metric. The investment team thinks about risk management in exactly the same way as they do for Global Franchise. They consider absolute risk – the chance of losing money – as integral to their stock selection process. |
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| 3 | Income Generation |
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A systematic options overwrite strategy developed by Morgan Stanley Investment Management’s Solutions & Multi Asset team is used to generate income in addition to the dividend yield on the underlying stocks. Short-term index call options on six liquid global indices are sold, earning premiums. Call options on indices, rather than the underlying stocks, are sold in order to retain the individual stock level exposure of the portfolio as well as reducing the likelihood of conflicts of interest between the stocks and the options. |
