“We have seen a very stimulatory environment, but the economies we are looking at are still not particularly strong. Companies’ revenue growth has been lacklustre over the past two years. There has been significant margin expansion, but that is becoming increasingly difficult to generate. There is likely to be slow earnings growth from here,” he explained.
Headley pointed out earnings in Europe and the US had been flat or only slightly higher over the past twelve months at a time when share prices have risen 15% or more. This rise is attributable to an expansion in the valuation multiple. He added: “It is much more difficult to find value in this environment and the outlook for revenue and earnings growth is anaemic.”
He is currently focused on uncovering value in emerging markets, but said while stock markets in countries such as China look superficially cheap, the overall valuation masks significant discrepancies between the large state-owned enterprises and entrepreneur-run businesses. However, he added: “We are looking at emerging markets to identify companies we would like to buy and have identified some we would purchase at 5-10% below the current level.”
Sea-change in healthcare
Healthcare is a significant theme in the fund. “There has been sea-change in attitude on the part of senior management in the pharmaceutical companies. Research and development investment used to be haphazard, with lots of scientists with pet projects.
“Now companies such as GlaxoSmithKline analyse each project in detail including the cost of developing a drug, its chance of getting approval, likely revenue and competing drugs in order to calculate if they will earn a satisfactory return on each project. They are starting to see the benefits of that now and are much more focused on shareholder returns. There has been some re-rating in these stocks and we believe it will go further,” he said.
Headley aims to identify high quality companies and then buy them at the right price. This may mean waiting for some time, or until they make a mistake. He labels it a ‘time arbitrage’ strategy: “We know most investors have a short term horizon compared to us.”
The fund is top of the global equity income sector over five years, having delivered a return of 62%, compared to a sector average of 45.2%.
