Global Franchise Strategy
Global Franchise Strategy

Global Franchise Strategy

 
 
 
Summary

The Morgan Stanley Global Franchise Strategy is a concentrated global equity strategy that offers a differentiated approach to investing. The strategy seeks to generate attractive returns by investing in high-quality businesses, characterized by dominant intangible assets, high returns on operating capital employed (ROOCE) and strong free cash flow (FCF)  generation. To help achieve this objective, the strategy employs a “buy-and-hold” approach to construct a concentrated portfolio, with stock selection informed by rigorous fundamental analysis.

 

 
 
Investment Approach
Philosophy

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 stable, consistent returns and help preserve capital. 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 relative downside protection. The team’s research shows that these high-quality franchise 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 returns in both inflationary and deflationary environments.1

 
Differentiators
Defensive characteristics

The team’s research shows investments in high-quality companies, which exhibit characteristics such as strong franchise durability, high and recurring cash flow generation, low capital intensity and minimal financial leverage that have generated competitive returns across market cycles.

Managing the risks that matter

The team’s criteria and disciplined investment process create a concentrated portfolio that is highly differentiated from the benchmark. The team attempts to minimize loss of capital, rather than tracking error, by focusing on franchise resiliency, management quality, financial strength and valuation.

Differentiated returns

The team’s goal is to compound shareholder wealth at a strong rate over the long term; therefore, capital preservation is key. Because of the specific investment criteria and the disciplined manner in which it is applied, the Global Franchise Strategy has the potential to offer: attractive long-term return potential with lower absolute volatility than traditional benchmarks; a strong bias towards capital preservation; and low annual turnover due to a long-term investment horizon.

 
 
 
Investment Process
How Quality Works–the Power of Compounding
 
How We Identify Compounders
1
Find High Return Companies
  • High and unlevered ROOCE
  • High gross margins (pricing power)
  • Capital-light business models driving FCF generation
  • Strong balance sheet
  • Return of cash to shareholders
2
Make Sure Returns are Sustainable
  • Intangible assets – portfolio of strong brands, copyrights, licenses or networks, which act as high barriers to entry
  • Returns sustainable against material threats, including Environmental or Social issues
  • Dominant market shares protecting against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Geographic spread
  • Steady organic growth
3
Check Management Looking to Sustain Returns
  • Committed to innovation and investment in franchises
  • Focus on returns on capital rather than sales or EPS growth
  • Capital discipline (reinvest FCF at a sustainably high ROOCE or return the excess capital to shareholders)
  • Appropriate management incentives
  • Sound Governance structure
 
 
 
 
Investment Team
Head of International Equity Team
26 years industry experience
Managing Director
24 years industry experience
Executive Director
20 years industry experience
Executive Director
20 years industry experience
Executive Director
16 years industry experience
Executive Director
18 years industry experience
Executive Director
10 years industry experience
Executive Director
8 years industry experience
Vice President
11 years industry experience
 
 
 
 

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