Peter Sackmann

Speaking to financial advisers at a recent Pan-Tribal lunch, Peter Sackmann of Davis Advisors took attendees on a world tour, looking at markets, sectors and stocks in each region.

Peter Sackmann, CFA, analyst and portfolio review committee member at Davis Advisors (Davis) told attendees that the US market had been hampered by twin uncertainties – a divisive and contentious election campaign, and the timing of the tightening cycle expected by the US Federal Reserve (the Fed).

“Once we get past the election cycle, the business climate is good; we are encouraged by signs of life across industries,” commented Sackmann.

“Rarely does an election dictate how good or bad a company is.”

While US growth is uneven, Sackmann pointed to a range of factors that support a positive outlook.

“When you have unemployment under 5% (it was 10% during the GFC) and a broader-based earnings profile – companies reporting decent earnings, if not record earnings – you have a solid growth foundation for the future.

“It’s a tale of two markets right now in the US – the S&P has done pretty well this year, but its spoils are not treating everyone evenly. Sectors known for paying high dividends have outperformed, but are now expensive. Out of favour sectors look more attractive.”

On the other hand, the outlook for European companies isn’t so rosy.

“Europe is challenged in a number of ways,” said Sackmann, outlining the issues as follows:

–      Anaemic growth – this reflects relatively soft employment numbers, country by country. Unemployment – and ‘underemployment’ – among young workers is much higher than the headline averages.

–      The negative interest rate experiment has resulted in approximately US$14 trillion of bonds globally trading at negative interest rates; the result is they cease to have the features and benefits of real bonds

–      Rising inflation could cause a whipsaw effect in bond markets and result in capital flight from the asset class.

”Davis has few investments in Europe at the moment. This is not a result of Brexit, rather a reflection of the low growth environment and the impact this has on earnings growth, coupled with full valuations,” said Sackmann.

In Asia, Davis retains a strong focus on the Chinese consumer.

“China is more supportive of entrepreneurship than other parts of Asia. Owner operators in China are now among the best in the world, a significant move from 10 years ago,” said Sackmann.

“However, you have to go into China to assess companies, as it is not a level playing field. For example, Amazon spends around US$500 million to $1 billion a year trying to get into China and have just 1.5% market share after years of effort.”

There are approximately 50 markets in the global economy and Davis aims to find the best in terms of liquidity, transparency of financial information, and professionalism of management. At the margin, they also look to invest in countries that support, encourage and celebrate entrepreneurs and capitalist success.”
The Pan-Tribal Global Equity Fund, managed by Davis Advisors, currently invests in 48 companies across 13 countries. While regional factors are an important input into stock selection, the strategy that underpins the Pan-Tribal Global Equity Fund is a fundamentals-based, unconstrained approach, with bottom-up research conducted in-house. The portfolio holdings represent high conviction ideas from a universe of global investment opportunities.

Colin Woods, Pan-Tribal CEO commented, “I have been very pleased with the traction the Fund has in the market; it’s available through most of the major platforms and is getting supported by a number of key financial planning groups.”

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Peter Sackmann

Earlier this month, two investment professionals from Davis Advisors (Davis) visited Australia and presented to a number of financial advisers. Peter Sackmann, Director and member of the Portfolio Review Committee, and Danton Goei, Portfolio Manager of the Pan-Tribal Global Equity Fund, provided an overview of the Davis investment approach, the Fund’s portfolio and answered range of questions from advisers.

Davis takes a truly global perspective when it comes to investing and every analyst at Davis is a global analyst. This methodology was introduced in the 1990s, well before most other investment managers adopted a global approach. Davis recognises that a global view is very important as most businesses are now operating and/or competing in the global arena; there is a high degree of interconnectedness and a very competitive landscape.

Each analyst spends a significant amount of time travelling and visiting company management, and building extensive networks that include industry groups and other investment houses.

Funds managed by Davis, including the Pan-Tribal Global Equity Fund, don’t look anything like the benchmark, and not much like other global equity funds available to Australian investors. While many funds have several stocks in common in their top 10 holdings, Davis is comfortable taking a different approach.

To be represented in a benchmark, a company needs to meet three requirements:

1. It needs to exist
2. It needs to be public
3. It needs to be large.

Under Davis’s investment philosophy, these factors do not help select worthy investments from an opportunity set of 2,500 investment candidates. Focusing on tracking the benchmark is not a recipe for great results, particularly in a global context.

On average, the Fund has just 60 holdings from this broad field. Being benchmark agnostic allows Davis to focus on identifying businesses they want to own, and provides a broader opportunity set in terms of geography, market cap and sector allocation.

Active share measures an investment strategy vis-a-vie its benchmark – the higher the active share, the less the strategy is like the benchmark. Not surprisingly, the Davis global equity strategy – and the Pan-Tribal Global Equity Fund – has an average of 90%+ active share.

As a result, the portfolio of the Pan-Tribal Global Equities Fund looks quite different to those of other global equity funds. Some funds focus on mega cap, some are more US-centric, while others either eschew or focus on developing markets.

In the 1980s it was a good idea to get exposure to a range of economies through investment in multi-nationals; it was this way that many investment managers were able to access China and other developing markets.

In today’s environment however, while some multinationals make good investments, it can be better to focus on key companies in specific markets; many of these are providing serious competition to the multinationals. Increasingly, local businesses with great brands, good management teams and strong operations are providing excellent investment opportunities. Focusing on mega cap businesses can be opportunity lost.

While these businesses might take more work to identify, Davis believes it is worth the effort find great ‘compounding machines’ in all corners of the globe.

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