Written by: Douglas Bennett, Client Portfolio Manager, Vontobel Quality Growth Investment Team
“THESE 10 COMPANIES CONTROL EVERYTHING YOU BUY” screamed a 2017 headline in the UK’s Independent newspaper.1 While the article was about the extensive reach of global branded goods companies, the journalist’s point is well-taken. The many well-known brands that consumer staples companies produce, and we consumers cherish, have become ubiquitous in our society today.
Some popular global consumer staples companies includes Nestlé, Danone, Kellogg’s, Coca-Cola, PepsiCo, ABInBev, Heineken, Philip Morris International (PMI), British American Tobacco (BAT), Unilever, Procter & Gamble, L’Oréal and Estée Lauder. These staples companies develop, manufacture and market products that consumers use on a daily basis in the sub-segments of food and drink, tobacco, household supplies, and personal care and cosmetics. The companies are superb marketers, enticing us with clever ad campaigns to buy their brands and ignore less expensive, healthier, or otherwise better alternatives. They carefully raise prices on existing products and heavily invest in new products that they anticipate we will buy in the future. And their focus has expanded away from their developed home markets into foreign ones, particularly into higher-growth emerging markets.
At the Vontobel Quality Growth Boutique (QGB), our top priority is the long-term appreciation of our clients’ assets. Given their overall long-term earnings consistency, a select few consumer staples companies, in both developed and emerging markets, fit well into our portfolios where we seek high quality growth stocks trading at sensible prices. Although the general market runs hot and cold about staples companies and their valuations, we expect the earnings of our quality growth staples companies to be higher five years from now than they are today. So even when investors shun these companies and even when their stock prices underperform the market, we are content to have our portfolios include meaningful positions in quality consumer staples.
Proposition: Growth + Downside Protection = Better Performance
In rising markets, quality staples companies can provide good dividend income and reasonable earnings growth, thereby supporting overall portfolio growth. And in falling markets, we believe the companies’ consistent earnings can provide stability to our portfolios’ overall earnings’ growth rates. As a consequence, our staples companies have historically performed well for our portfolios.
As an asset manager, it is our job to buy the right stocks for our portfolios. We actively screen for the best companies based on quality attributes including consistent or increasing EBIT margins and high ROE and ROIC levels. We weed out the other, lower-quality companies. There are approximately 1500 consumer staples companies in which we could invest globally, but our screening process reduces the number of companies we consider to be high-quality to less than 100. We invest in approximately 10-15 of these quality consumer staples companies in our global portfolio at any one time. As of 31 May 2018, we owned 11 companies which we consider to be the best ones in terms of quality, growth and that are trading at sensible prices.
In this paper, we explain why we believe QG staples companies are an integral part of our portfolios:
- their general earnings growth consistency means they should continue to perform well over a full market cycle;
- they are addressing issues around changing consumer tastes, e-commerce, and other challenges; and
- they provide a low but steady growth component that is a counterbalance to the higher-growth investments in our portfolios.
1 Taylor, Kate, "These 10 Companies Control Everything You Buy", independent.co.uk, 4 April 2017