We live in a fast-changing world: demographic changes and growing wealth in many developing countries have led to structural shifts in economic activity and consumer behaviour.
This, in turn, is having a major impact on the fortunes of those companies exposed to these trends. Companies that need strong management so they are run profitably and in the interests of long-term shareholders. The most successful managers over time have been those that are one step ahead of the market in realising the significance of these trends, positioning their fund to benefit from the many investment opportunities arising as a result.
A fund that has benefited from such trendspotting has been the M&G Global Basics Fund, managed by Graham French. One of the key factors behind the fund's success has been Graham's contrarian skill in spotting long-term thematic and industrial trends well ahead of the market. From the beginning, he recognised the importance of being on the right side of the growing gulf between the so-called developing East and developed West. Recognising the shifting dynamics of the global economy, he invested in those companies that provide industrialising economies with much-needed materials, goods and services. Companies as diverse as BHP Billiton, P&O and Colgate-Palmolive have contributed considerably to the fund's success as investors came to appreciate the value of their assets and resources.
In contrast, for many investors anchored in the developed world, holding companies that have struggled to compete with the East's lower-cost manufacturing advantage, the past 10 years have seen a steady erosion of value. This has been starkly illustrated by the decline of industries such as European steel manufacturing and the US auto makers.
In essence, much of the fund's success can be attributed to the view that: "For anything emerging markets make, prices will fall. For anything emerging markets need, prices will go up." The fund, in general, has been positioned on the correct side of this balance. Graham believes that the next decade will continue to see rising demand from increasingly wealthy consumers in developing economies for a broad range of goods and services, benefiting those companies that produce them.
The decade of the physical asset
When the fund was launched, the market's over-exuberance about the ‘new paradigm' of the digital economy had resulted in an asset bubble in the shares of technology and internet stocks. Large swathes of the old or real economy had become increasingly unloved and therefore undervalued, precisely at the time that demand for ‘real' or physical assets was about to receive an enormous boost from China's rapid industrialisation. So Graham adopted a highly contrarian strategy focused on undervalued assets in the real economy. His prescient thesis at the time was: "The 1990s was the decade of the paper asset; this will be the decade of the physical asset."
This straightforward, long-term investment strategy of investing in well-managed companies with strategically valuable assets has been extremely successful. And the sentiment remains equally relevant today. The Chinese authorities, for example, remain acutely focused on accumulating resources that the country lacks domestically.
Also, in an uncertain world, physical materials and goods become more valuable. Take gold, for example: "In a scenario of rising sovereign debt risk, where government finances are hugely overstretched and central banks have been systematically devaluing paper money, gold's value as a safe haven and a stable physical currency can only increase over the medium term," says Graham.
What about the next 10 years? There is much to be optimistic about despite weaker economic growth and sovereign debt issues in the West. The financial problems in the US and Europe are unlikely to halt the economic progress taking place in the emerging world or destroy people's aspirations.
A fundamental shift of economic power from the developed West to the developing East has been under way for some years now. And many developing countries are undergoing rapid transformation, investing in infrastructure, which is generating strong demand for raw materials, and resulting in more people moving into towns. The chart shows urbanisation rates, indicating how far these developing economies have to go to reach levels of development in the West.
Spending on public works is creating jobs and leading to a step-up in household income, producing an increasingly affluent middle class who are spending money to improve their quality of life.
With this in mind, Graham has been gradually building up exposure to consumer-orientated stocks - world-class companies that understand the dynamics of the emerging world and know that with the right products, and in the right markets, the rewards could be tremendous.
To hear more from Graham French, visit www.iviewtv.co.uk
For Financial Advisers only. Not for onward distribution. No other persons should rely on any information contained within this article. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776.
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