Global Franchise Strategy
Global Franchise Strategy

Global Franchise Strategy

 
 
 
Summary

The Global Franchise Strategy is a concentrated equity strategy that offers a differentiated approach to investing in global stocks. The strategy seeks to generate attractive returns by investing in high-quality franchise 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, 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
1
Investable universe

Companies are screened based on financial metrics that the team believes are associated with strong franchise businesses. The key characteristic of these companies is they combine sustainable, high unlevered ROOCE with low volatility of unlevered EBITA margins resulting from a combination of recurring revenues, high gross margins and low capital intensity. This combination helps support strong free-cash-flow generation, which, crucially, must be either reinvested at similarly high returns or distributed to shareholders.

2
Security selection

The team looks for high-quality businesses with the following characteristics: difficult-to-duplicate intangible assets that help to protect the durability of the franchise; a sustainable, high ROOCE on an unlevered basis; high gross margins and low capital intensity; a reliably recurring revenue stream; and financial strength and capable management. The team monitors for signs of franchise abuse and how management allocate capital, looking for appropriate investment in intangibles (such as advertising) to grow the business for the long term, or any signs of prioritization of short term earnings-per-share targets taking precedence over high sustainable long-term ROOCE.

 
 
Portfolio Managers
Head of International Equity Team
25 years industry experience
Managing Director
15 years industry experience
Managing Director
25 years industry experience
Executive Director
19 years industry experience
Executive Director
19 years industry experience
Executive Director
15 years industry experience
Executive Director
17 years industry experience
Vice President
9 years industry experience
Vice President
8 years industry experience
Vice President
11 years industry experience

Static File Component

 
 
Insights
Market Outlook
A Quality Guide to Governance
Nov 29, 2017
The International Equity Team explains why capable company management is key, and why they believe good governance is even more important in high-quality companies.
Investment View
Q&A with Nic Sochovsky
Dec 29, 2015
Nic Sochovsky, a portfolio manager on the International Equity Team, discusses the team’s significant exposure to what they consider high-quality Consumer Staples.
Macro Insight
The Power of Compounders with William Lock
Sep 27, 2017
William Lock explains why he believes a company’s intangible assets are integral to achieving sustainably high returns.
 
 
 
 

RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

Past performance is not indicative of future results. As of December 31, 2015. Provided for informational purposes only and should not be construed as how the strategy has or will perform.

 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS
Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock.

Return On Operating Capital Employed (ROOCE) is a ratio indicating the efficiency and profitability of a company’s trade working capital. Calculated as: earnings before interest and taxes/property, plant and equipment plus trade working capital (ex-financials and excluding goodwill).

Free cash flow (FCF) is operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends.

Earnings before interest, taxes, and amortization (EBITA) refers to a company’s earnings before the deduction of interest, taxes and amortization expenses. It is a financial indicator used widely as a measure of efficiency and profitability.

Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns. 

Active share is the fraction of the portfolio or fund that is invested differently than its benchmark as of the last day of the reporting period. A portfolio with a high degree of Active share does not assure a fund’s relative outperformance.

OTHER CONSIDERATIONS
The MSCI World (Net) Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions. Investment team members may change from time to time without notice.

The weights, tracking error typical yield duration, and the number of issuers represent represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades. 

 

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