Standard Life’s man in Boston

Jeff Morris, head of US equities at Standard Life Investments, talks tech, soft drinks and cut-price retailers

One Beacon Street, a Boston skyscraper near the top of Beacon Hill, offers tenants a commanding view of the surrounding city. It’s from this location that Standard Life’s US equities team – headed by senior vice president Jeff Morris – keeps tabs on the nation’s stocks.

Morris also manages two funds for Standard Life: the American Equity Unconstrained Fund and the North American Unit Trust.

Jeff Morris
Standard Life's head of US equities, Jeff Morris

Apple is your largest holding. What are the critical areas of its likely growth?

The growth of the iPhone is the most critical driver of the firm given its high margins and thus outsized contribution to earnings. Apple will likely need to broaden its iPhone portfolio to offer more affordable versions as growth is increasingly driven by lower-income regions. Potential new product lines – such as a more meaningful manifestation of the firm’s TV ‘hobby’ – are important.

How successful was the transition after the death of Steve Jobs?

Given his importance to the company, the transition went about as well as could be hoped, and Tim Cook has been well received by the market as a strong operator. But the bigger question is: can Apple successfully innovate and reinvent itself over time without his leadership?

What are the most significant competitive pressures on the IT and telecoms companies you have invested in?

Within IT there is persistent innovation. The most significant competitive pressure, particularly for larger companies, is an unwillingness to embrace new technology trends and an over-emphasis on protecting current profit pools.

What have you bought in the soft drinks industry?

Dr Pepper Snapple is set to gain from stronger prices, now that Coca-Cola and PepsiCo have sent signals of an end to the price wars that hit margins. We also expect Dr Pepper Snapple to benefit from its program of cutting costs.

The company is likely to profit from its greater focus on the domestic market, compared with some bigger competitors. US customers are more robust than European consumers, specifically, and Dr Pepper Snapple has been winning market share at home. The market does not yet fully value the company’s continuing margin improvements and volume gains.

Which cut-price retailers have you invested in?

TJX Companies – demand for its designer labels and household goods at steep discounts is supported by a long-term shift in the clothes women buy. Given tight budgets, women are now less likely to buy clothes they wear only at work or only for leisure, resulting in less obvious delineation between business suits and more casual clothes.

This trend has benefited retailers that can sell affordable, fashionable clothes, especially businesses that manage their supply chains well, because they can dispatch fashion-led items fast to meet customer demand. TJX has been investing heavily in its supply chain, and we expect this to mean higher turnover from leaner inventories.

It’s also continuing to grow internationally, with a significant number of new stores planned for the UK, Germany and Poland. The European operations are less profitable than their North American counterparts, but the gap is narrowing, and we expect margins to progress toward North American levels over time.

The broader market has yet to recognize the full benefits of TJX Companies’ supply chain changes or its increasingly profitable international expansion.

In which areas did corporate fundamentals beat macro themes and herd-like investors?

Sprint Nextel saw corporate fundamentals triumph over investor sentiment during 2012. Historically, Sprint was a distant laggard behind market leaders AT&T and Verizon, but in 2012 it successfully gained funding, started to modernize its network and began a cost reduction program, which will dramatically improve its profitability and industry competitiveness.

The firm also secured strategic investment from its Japanese partner, Softbank. Against a backdrop of flat performance for the MSCI Telecom Index in 2012, Sprint delivered returns of more than 140 percent.

In the retail sector, Home Depot’s management restructured internally, which resulted in better inventory control, superior purchasing and a number of additional efficiency gains.

This led to a string of strong earnings results during 2012 and positioned the company well for a housing market recovery in the US. Once again this was reflected in the company’s share price, which went up more than 50 percent during 2012.

Do you typically meet with companies before investing?

In most cases, yes; ongoing dialogue after we have established a position is important as well. Our preference is to meet with senior management but often the IR person can be very helpful, too.

Some of the most interesting meetings are with division heads who can provide more detail than the C-level managers. The sell side is responsible for most of the corporate access events we attend but with smaller companies we can set up the meeting directly.

To what extent do you use sell-side research?

We use sell-side research as part of our investment process but predominantly to determine what the consensus view is: actual buy/hold/sell ratings have little or no influence on our investment decisions.

Are there any companies you think have particularly good IR?

Generally speaking, good IR programs provide the investment community with access to senior management and provide disclosure of key metrics useful in the investment decision-making process.

Some exemplary IR efforts will encourage the sell side to invite specific buy-side clients to events the sell side is hosting in order to make sure the buy side is getting access to the company.

Less value-added IR efforts are ones where the IR person will only repeat what has been stated in the latest 10Q or 10K.

FUND SNAPSHOT

Fund name: American Equity Unconstrained Fund
Fund size: £44.6 mn ($71.6 mn)
Number of holdings: 52
Description: The fund aims to provide long-term growth by investing in US or Canadian equities (including a limited exposure to Latin and Central America). The fund typically holds a concentrated portfolio of stocks and is actively managed by Standard Life’s investment team, which selects stocks, without reference to index weight or size, to try to take advantage of opportunities it has identified
Top 10 holdings
1. Apple
2. The Walt Disney Company
3. Precision Castparts Corp
4. Ford Motor
5. Hanesbrands
6. Dr Pepper Snapple Group
7. Beam
8. JB Hunt Transport
9. BorgWarner
10. Union Pacific Corporation

Details correct as at November 30, 2012
Source: Standard Life Investments



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