Nic Sochovsky, a portfolio manager in the International Equity Team that manages the Morgan Stanley Global Franchise, Global Quality and International Equity strategies, has over 17 years’ experience analyzing and following the Consumer Staples (Staples) sector. Here is a sampling of the Q&A in which he discusses the team’s significant exposure to what they consider high quality1 Consumer Staples.
For a Staples company to win today, what do you look for?
Nic Sochovsky (NS): The starting point is companies that invest in “pull” marketing strategies, principally using innovation and media to create brand loyalty and awareness. “Push” tactics that focus on promotion are far less durable in our opinion.
Second, management teams that “Act local, think global.” We believe that decision making at the local market manager level, married to centralized back office functions that leverage global scale, is the most effective model.
This means the right corporate culture is key; there is no such thing as a global consumer. Tastes, culture and traditions matter and they differ greatly. By running global marketing campaigns, or using global research & development centers, companies risk missing the intricacies and opportunities offered by local consumers. Local players have picked up on this, not only in Developed Markets (DM), but also in some Emerging Markets (EM). Global players are now beginning to cede market shares in key EM, none more so than China. We believe that by following a decentralized model, it offers the opportunity to manage both local and global brands. For example, a French-based global spirits company, on acquiring a foreign whisky operation from a competitor years ago, put local managers in charge. Today they run a leading local premium spirits business in that location with its leading brand accounting for 9% of group sales, growing at over 15% per annum (p.a.) and generating a return on equity over 100%.2
What in your view drives the strongest compounding in Staples?
NS: It is all about consistency. Staples’ 25-year 12-month rolling earnings growth average is 7.1% p.a. compared to the market’s 5.5% p.a. Staples’ volatility is 11.4% vs. the market’s 18% over the same period. Not only has Staples’ earnings growth been higher but its volatility has been lower. The result? Staples has risen by 7.6x vs. the market at 4x.3
How do you think a rising-rate environment will impact Staples?
NS: Since 2011, the correlation between Staples’ price relative to the market and U.S. Treasury yields has been 94%.4 So we believe that in a rising-rate environment, Staples is unlikely to re-rate. However, it is worth bearing in mind that Staples is only trading marginally above its long-term average relative P/E multiple, when compared to the broader market. Against a macro backdrop of global debt levels above those of 2008, with growth continuing to disappoint, and where “lower for longer” looks the most likely course for rates, for us—relative to the broader market which could be more vulnerable—the risk reward remains in favor of being overweight Staples.
1 References to “Quality” and “High Quality” herein reflect the investment team’s opinions regarding certain factors of an issuer, which may be subjective.
2 Source: LSA. Data as of September 4, 2015.
3 Source: MSCI Europe Index and a weighted average index of the large-cap Pan European staples companies complied by Credit Suisse using Datastream, from June 19, 1989 to August 24, 2015.
4 Source: MSCI European Consumer Staples Index relative to MSCI Europe Index, January 1, 2011 to May 30, 2015.
The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel 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 is for informational purposes only and should not be deemed as a recommendation. The information herein does not contend to address the financial objectives, situation or specific needs of any individual investor.
Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.
Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.
For the complete content and important disclosures, refer to the pdf above.