A Bottom-Up Approach for Uncertain Times

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I’m Murdo MacLean. I’m a client investment manager with Walter Scott.

The question about whether U.S. equities can perform as well as they have done in the past decade, looking at the recent COVID-19-related shock, it’s a valid question. Can it continue? I think there are some strong arguments in favour that it can. The country is a large country, by population. It’s well-educated, generally speaking, relatively healthy demographics and a pretty healthy — thriving, some would say — corporate sector, not only in the Silicon Valley area of IT. But at the same time, it is likely to be facing a fairly significant recession as a result of COVID-19 — almost definitely, as is the rest of the world, to be fair. But I think with a long enough outlook, the U.S. should do just fine, given the attributes that I mentioned. We’re underweight today, the U.S., with respect to the benchmark, which, as a bottom-up investor who doesn’t use benchmarks to construct portfolios, that doesn’t really concern us overly. Indeed, it’s been the case pretty much for the entire 35 years that we’ve been in business.

I would say that on the other side of that, that it’s a fact that we continue to find also significant number of interesting companies that are American. In the first quarter of 2020, indeed two of the companies that we have added to try to take advantage of some of the volatility, two of those companies are indeed American: Texas Instruments and Illumina, two businesses that do very different things, but that are both U.S. domiciled. I think what I would say is that the fact that they’re American doesn’t really underpin why we bought them. It’s the business model. It’s the area of the global economy that they’re in which really interests us and of course, the prevailing valuations as well.

Texas Instruments is a tech space company in the area of IT. They are in the area of analog, semiconductor manufacturing. It’s a very interesting space as the world becomes more and more connected. Their market position is very strong, great return structure, all the things that we like, a very strong balance sheet. Indeed, not that long ago, we saw the move by some of their competitor’s analog devices to also acquire another player, Maxim Integrated products. We can see that that is a space just by the level of activity there, which is getting a lot of people excited and optimistic. That’s indeed, what underpinned our decision to buy Texas Instruments.

The other company that I’m talking about here is Illumina, which is a San Diego-based healthcare business in the area of gene sequencing. We think that they are at the very cutting edge of what is an extremely exciting part of the global healthcare space and indeed as the world looks to develop drugs that are more targeted to individuals, Illumina’s products and services will be absolutely crucial to bridge into that destination.

In terms of markets that are non-U.S. market and which ones do we like, et cetera. I think perhaps turning the question slightly on its head, at Walter Scott, we invest in global equities. We follow a tried and tested bottom-up, benchmark, agnostic approach to investment, that has stood the test of time. It’s worked when Japan was at the height of its powers. It’s worked whilst the U.S. has continued to be a dominant force in the Western world. Indeed it’s worked when China and Asia, ex Japan, more broadly, has become its economic ascendancy in the last 20 years or so. Why is this the case? I think, because we invest wherever we can find great businesses. We interrogate these companies when we analyze them. We buy them and we hold them for the long term. Companies like these do exist indeed, in every corner of the world.

We don’t view countries as really adding anything to the conversation. It’s the companies themselves that interest us. It can be that we find businesses in Japan and we’ve done so for many years. We continue to find companies there, particularly industrial businesses, some of what Japan is best at, and you can consider some of the robotic or factory automation companies in Japan as continuing to be of great interest to us. Examples such as FANUC, that we’ve owned for the majority of our history. Companies like KITZ, in the area of centers. Indeed, most recently a company like SMC, which is a Japanese company, which is in the area of pneumatics, all feeding into a large and growing vector of the global economy in which this factor of automation and efficiency gains.

Japan, as much as from a top-down view, it can be cast aside, that would be a mistake for a bottom-up stock picker like us, and indeed the rewards are there if you’re willing to put in the work.

I would also say that, and this isn’t specific to the global strategy, but certainly in Scandinavia, the Nordics is a really interesting region. We’ve had some very successful research trips in the last few years to places like Denmark and Sweden and Finland. Companies such as KONE, a Helsinki-based global leader in elevators and escalators is just a world-class business. The fact that it’s located in Helsinki, really has very little to do with its appeal. It’s a global company with its operations in all the areas that you would want it to be. It’s a very resilient business model and we’ve seen that again in 2020, with its high level of maintenance contracts, really helping the business weather the storm.

Companies in Denmark, such as Christian Hansen, which is a company that’s of great interest. It’s a manufacturer of bacterias for the food and beverage industry. Again, all the return characteristics, the balance sheet strength, that you would look for: technology leader and enabler, if you will, for a great many brands around the world that you and I would be very familiar with. Really great niche or even large businesses can be found really pretty much everywhere. You just have to be willing to get out there and look for them.