Global Franchise Strategy
Global Franchise Strategy

Global Franchise Strategy

 
 
 
Summary

The Morgan Stanley Global Franchise Strategy invests bottom up in high-quality, well-managed companies at a reasonable price. Characterised by their powerful intangible assets, notably brands and networks, these companies have high and stable returns on operating capital which the team believes can be sustained for the long term. The strategy seeks to generate attractive long-term performance with reduced downside participation in challenging markets.

 
 
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.

 
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
Identify 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
  • Ability to remain relevant through powerful intangible assets such as brands, sustaining high barriers to entry
  • Returns sustainable against material threats, including Environmental or Social factors
  • Dominant market shares protecting against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Steady organic growth and geographic spread
3
Confirm management's commitment to sustaining returns
  • Focus on return on capital rather than sales or EPS growth
  • Capital discipline
  • Commitment to innovation and investment in franchises
  • Review management incentives
  • Sound Governance structure
  • Engagement on material issues or opportunities where relevant,including ESG factors
4
Valuation
  • A focus on free cash flow, not accounting numbers
  • FCF yield, DCF, EV/NOPAT
 
 
 
 
 
 

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