Meet the fund managers: Quality companies at a value price
In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Chris Rossbach, manager of the J. Stern & Co. World Stars Global Equity Fund.
This is a transcript from an interview you can watch online. It has been edited for length and clarity.
Tell me a bit about your fund
The World Stars Global Equity Fund invests, as the name says, in globally leading companies that have great quality. That’s a gating condition for us.
So a company has to have the quality that we’re looking for, and it can be as cheap as it wants: If it doesn’t have that quality, we won’t invest.
We look to buy those companies at valuations that allow us to generate strong compounding returns over time.
How do you stand out from your competitors?
For us, it’s very important to find companies that have quality on a forward looking basis. So it’s all good to do screening, to look for companies that have been consistent in terms of what they’ve been able to deliver.
But the key is, what are they going to do going forward? Why do they have a strong and sustainable competitive position? Why are they in a good and growing industry? Why do they have a management with a track record of value creation, and why do they have a balance sheet so strong as to weather any kind of adversity?
So those are the key criteria that we’re looking for, and what it takes us into is specific types of companies and industries that I think are highly differentiated.
We believe in digital transformation as one of the key aspects of the economy where there’s tremendous opportunity growth and value creation. So we have a number of stocks there, about 40% of the fund.
We also believe in consumer companies and healthcare companies. Some of those we think are very cheap, because it’s as if people have given up on the idea that consumers will continue to spend or that people will need health care, both of which we don’t think is the case, that’s about 20% each.
Then we also see opportunities in industrials, so companies that are solving the big problems that we’re facing. So it means that for us, sustainability, climate change, and the transition to net zero are not just risks. They’re opportunities for the companies that we invest in.
We have a very long time horizon, with up to 30 stocks that we invest in with the idea that we want to hold them for five, 10 or 25 years.
We’ve had stocks in our portfolio that we’ve owned since the inception of the fund in 2012, like Amazon.
What are you most excited about in your portfolio?
One really important thing is people often say that the market is very expensive, but if you look at the global market, its important to recognise that there’s some very large companies now, so that the index is highly concentrated, and some of those companies, like Tesla are very highly overvalued, and others, like Apple and Microsoft, are fully valued.
You’ll even see someone like Warren Buffett, who made possibly the most successful investment in the history of the world by buying Apple when it was very undervalued, has now sold a very significant part of his position because he sees that overvaluation.
So for us, we invest in companies, not in markets, and believe that many companies in our portfolio are very attractive valuations.
If I have to pick some, then I think one continues to be Nvidia. It’s our single largest position.
We had it on our watch list for years, as we were understanding what AI was doing and how it will be transformative for the global economy.
But we thought it was too expensive, until the great rotation of 2021 and 2022 when the interest rates normalised in a space of six to 12 months, and created an opportunity to buy Nvidia at very attractive prices.
We bought more through 2022 and now over the last 12 months, we’ve had to sell it three times because we have a hard position limit of 10 per cent and it’s been such a successful investment that it’s gotten close to those levels. But we continue to be very positive about Nvidia.
I would also mention the largest food company in the world that I’m very excited about: Nestle.
It has fantastic businesses in coffee, in pet care, in nutrition. It’s building one of the largest global nutrition businesses. But people have really given up on the idea that this is a company that can grow, that its brands are powerful, and that it will be able to continue to generate value.
It has had issues that are self made that it had to rationalise under the previous CEO, Mark Schneider, and around integration of businesses that really shouldn’t happen with a company of that size, but they’ve taken decisive action.
There’s a new CFO from Diageo, and a new CEO who’s a veteran of Nestle, somebody who knows a lot about brands and about how to reinforce what these brands mean and how they’re relevant for consumers.
We think that Nestle is at a point where the stock price has declined very sharply where the valuation is very attractive, and therefore buying Nestle at these valuations is an opportunity, like buying Nvidia in 2022.
What’s the worst mistake you’ve made managing the fund?
I say the effort is the team’s, but the mistakes are ultimately mine. The single worst investing mistake we’ve made is a position in Swatch.
It’s the world leader in watches and to this day, it’s a pure play, because watches are effectively all they do. It is a company that is very exposed to the markets that it’s in, and when we invested in it, it was also at a great value.
So, there was an overall consumer slump and there was the anti-extravagance measures in China, which accounted for 50 per cent of its revenue, that were put in place by Xi Jinping.
And the third was the Apple Watch, which has taken some share in terms of how people are using watches and wearables.
So we bought it, and it did well for a while but then declined. We decided it was so cheap that we would keep it and effectively owned it all the way back up again, because what markets do is they overreact.
But when Louis Vuitton declined for other reasons, we had an opportunity to sell Swatch and buy Louis Vuitton, so in aggregate, it was an adequate return, but it was a mistake.
The lessons were that it is a business that is too concentrated, that is too exposed to markets where there can be significant issues, and it is also a business that is too cyclical.