James Harries, co-fund manager of STS Global Income & Growth Trust, recently sat down with Kyle Caldwell, Funds and Investment Education Editor at Interactive Investor, to discuss the rationale behind the Trust’s underweight position in the US and how a continued weakening of the US dollar may lead to a once-in-a-generation buying opportunity. A summary of James’s interview is below and the full 20-minute podcast interview to listen to is available here.
Why do you have less exposure to the US in the Trust compared to the global stock market?
We haven’t been consciously reducing our US exposure and the current weighting (42%) is a long-standing position. There are a couple of reasons for that. First, we are running a global income and growth trust and while there are some high-yielding businesses in the US, there are some very large businesses, including the so-called Magnificent Seven, which are not. Second, the weighting of the US market within the global index is very high relative to history, so this also counts towards us being underweight the US. That said, we believe it is sensible to be underweight now, given the extreme valuations and concentration within the US market.
Does providing an income mean you are then less weathered to index weightings?
We have an absolute return mindset, building a portfolio of high-quality global franchises independent of any benchmark. However, the phenomenon whereby the main global index has run away from other indices is remarkable and, in our view, it makes sense to be diversifying away from that anyway. Our mandate is to provide a particular return stream for a particular cohort of investors. They tend to be those who have “irreplaceable capital”, which often comes in retirement when they need an income. This means that we will never be forced to chase index weightings in the way that other fund managers might be.
What are the key characteristics that you’re looking for when considering a new investment?
We focus on companies that have identifiable and sustainable competitive advantages. This may relate to factors such as brands, distribution capability or cost – but whatever they might be, the advantages enable these companies to potentially earn a better return over a long period of time than otherwise would be the case. In recent years, growth companies and growth styles of investing have performed very well relative to income styles of investing. If you look through history, investors tend to overpay for growth because they are investing in the most exciting companies. But the return you generate from an investment isn’t simply a function of how fast a company grows. It’s how fast a company grows relative to expectations. It is often the case that people get overexcited about growth companies [and hence overpay], whereas the types of businesses we invest in may not be the fastest growers but, through time, can produce a decent return. We want to own high-quality companies with strong competitive advantages and elements of growth, but they don’t necessarily have to be the greatest companies.
Did you review the Trust’s portfolio during the tariff-related market volatility earlier in the year?
Yes, absolutely. We reduced positions in some of the businesses that had been holding up well and added to some of the businesses that had performed relatively poorly (which has now reversed fully). We took advantage of the sell-off to establish a new position in Nike, which was in the crosshairs of what was going on. It sells trainers in the developed market and makes them in the developing market, particularly in Vietnam, which was facing punitive tariffs. Nike has made some strategic missteps in the past couple of years, such as focusing on its online business and allowing competitors to encroach on its retail footprint. Its shares were down around 77 per cent from their high as a result. But this is Nike! This is one of the great global sportswear franchises; it has no debt and it is a fantastic brand. We think that it can overcome the tariffs by putting prices up or moving production and getting itself back to being the premier global sports-led branded apparel business.
What are your thoughts on current stock market valuations?
We invest conservatively with a focus on valuation and quality. The US market is very expensive by historical standards and because interest rates have risen, the market looks expensive relative to bonds and other asset classes too. However, other parts of the world, and I would highlight the UK here, are not as expensive. The UK market has been in the ‘doghouse’ for a long time and to us, geographically and idiosyncratically, it looks cheap. We have recently taken advantage of investing in several high-quality global businesses listed in the UK that have a decent return profile and are cheap.
Could you highlight some examples of the UK stocks you have bought?
While we are overweight the UK, I would mention that if you look at indices and our portfolio on an underlying revenue basis, the difference isn’t nearly as stark. We have about 32 per cent exposure to companies listed in the UK, but based on where their revenue is generated, it would be only around 6 per cent exposed to the UK. We hold several UK businesses that many people would be familiar with, including Unilever, Reckitt Benckiser and Admiral Group. Admiral, for example, is a very special business and arguably the only ‘proper’ UK company we own; it is an extremely good underwriter and very adept at managing the insurance cycle.
Do you think the US dollar will continue to weaken?
Traditionally, the US has seen the dollar as an exorbitant privilege. Being the world’s reserve currency has given it real power within the global economy. But more recently, it has been viewed as a burden and as a cost to the US – and I suspect that the days of a strong dollar may be behind us. Based on this structural declining trend, it may be that at some point there will be an opportunity to buy the best businesses (which tend to be in the US), in the best economy (which tends to be the US), in a cheap currency and a really competitive economy. That’s a prize we are ready to take advantage of when it comes.
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