The BNY Mellon Global Leaders Fund was borne out of investor desire for an even ‘purer’ version of Walter Scott’s Long-Term Global Equity strategy.
The Edinburgh-based firm – which celebrates its 40th birthday this year – launched the Global Leaders strategy in order to meet clients’ evolving needs. The result? A portfolio of its highest conviction ideas – between 25 and 30 stocks – to hold for the long-term, strictly centred upon businesses that have strong balance sheets, are highly profitable, and have pricing power. The philosophy and investment process mirror that of the Long-Term Global Equity strategy; the only difference being the more concentrated nature of Global Leaders.
“The fund is Walter Scott in its purest form,” explains Dent, who joined the firm as an investment manager in 2008. “The pandemic years gave a really good test of the strategy’s resilience, something which we see as a non-negotiable attribute for a fund like this; a focus on companies with a history of resilience in various market conditions tends to underpin the resilience of a fund – the Covid era showed that,” he adds.
Quality, quality, quality
Launched in December 2016, it might seem like the fund’s large technology weighting – at around 40% – has driven performance, but that’s not been the case. “Tech is a major part of the fund, along with healthcare and the consumer, but it’s important to note that we don’t hold a number of the companies that have been major drivers of the market this year, most notably Nvidia and Apple. While our tech holdings have delivered solid returns, our approach is conservative and we have largely sat out the ‘big 7’ tech rally as a result,” Dent says. “Valuations are all-important and we are very wary of going anywhere near those companies at risk of being in bubble territory,” he adds.
Healthcare has been the greatest source of relative outperformance, again down to stock selection. The sector makes up around 36% of the fund, and holdings such as West Pharmaceutical Services and Intuitive Surgical are among the portfolios largest holdings.
Dent identifies West Pharmaceutical as a typical Global Leaders company. The US business is a manufacturer of packaging components and delivery systems for injectable drugs and healthcare products. “It had a phenomenal pandemic,” he explains, “which comes as little surprise when you learn that the business is focused on producing the vials, seals and stopper for injectable medications. When drugs get FDA approval, the containment solutions – encompassing vials, seals and stoppers – require approval too, pretty much locking in the supplier for the lifetime of that drug run; this gives good visibility, music to the ears of long-term investors like us,” Dent adds.
The company’s share price, like many of those which enjoyed a knock-out pandemic, had suffered from something of a hangover over the past 18 months or so as the market grappled with the valuation of the business after such a freak event. Dent continues: “We saw price weakness as an opportunity to establish a position and initially added it to the portfolio in October 2022, topping it up a couple of times since. It is a business that benefits from the rising complexity of medications, and the shift towards more biological molecules increases its pricing power. Supported by long-term structural tailwinds, it is a high-quality company and boasts exactly the type of characteristics we are looking for in the fund,” he explains.
Elsewhere, the fund’s lack of energy exposure – not a philosophical stance, merely the result of a current lack of opportunity – has also boosted relative performance, along with being underweight, coupled with strong stock selection in, consumer staples – L’Oréal being a notable contributor.
Keeping active
“We are moving into an environment which not only favours active management, but our kind of active management,” Dent says. “The implications of an inflationary, high interest-rate environment are significant; are the companies in which we invest able to weather those challenges and continue to thrive?
“In 2021, before inflation started its sharp ascent, we pored over the portfolio to firmly challenge every company we own to see if they were able to stand up to that test. We were pleased to conclude that the core characteristics of the companies in which we invest – highly profitable, pricing power, strong balance sheets – hold the portfolio in good stead,” he adds.
Dent continues: “This year looks to be the real test of pricing power – 2022 saw pretty much all areas of the market able to put price hikes through, but now is the true test as inflation actually bites. We believe this will favour those genuinely high-quality businesses with pricing power.”
From a valuation point of view, the sell-off at the start of 2022 means that valuations look a lot healthier than they were, according to Dent, with many having come back closer to their five- to 10-year averages. “As such, it feels more like a starting point compared to the heady days of late 2021,” he explains. “There will be opportunities to add high-quality businesses that benefit from structural tailwinds – our task is to take advantage when those opportunities arise,” Dent concludes.
For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents.
Please refer to the prospectus and the KIID before making any investment decisions. Documents are available in English and an official language of the jurisdictions in which the Fund is registered for public sale. Go to https://www.bnymellonim.com
