Buy-side interview: Durable franchises – Electronic Arts, Dollar General and Becton Dickinson

Mar 23, 2021
Northcape Capital’s Fleur Wright talks long-term franchises, ESG hurdles and meeting with management

Fleur Wright is a former Sydney-based sell-sider for UBS. She moved to the buy side in 2018, joining international boutique fund manager Northcape Capital, which has more than A$12 bn ($9.2 bn) in funds under management. Wright is part of the investment team on the Global Equities Fund, a concentrated fund of typically 20-40 stocks. Here she talks to IR Magazine about her approach and some of the stocks she’s excited about.

Have you seen an increase in companies getting in touch directly as a result of the pandemic?

Not really. Northcape is a big firm, but we’re a small fund within Northcape and we only invest in 40 companies or so. It could be hard from a corporate perspective to understand whether they align with our investment philosophy but we do go out and specifically target companies we already think are interesting.

How has the transition to virtual changed how you meet companies?

It’s now become really easy to do a group call. There are a lot more group sessions and you can cover everyone because there are no limitations on room size when you go virtual.

How can companies be attractive to Northcape?

We look for what we call ‘quality businesses’: some form of competitive advantage, good growth prospects. We take quite a long-term view and look for a good return on invested capital. We don’t like too much risk so either a steady earnings grower or a balance sheet that’s not too leveraged.

ESG is also one of those factors. [That doesn’t mean] we are necessarily investing in green energy, though. We just tend to have a minimum threshold, so companies that don’t meet what we consider to be an above-average level of ESG, we won’t go there.

If a company felt it had those characteristics and said: Look, I’ve got a group call coming up in two weeks, I would probably listen in to that and do a bit of preparation work beforehand. Some of that can even be prerecorded. It might be able to show a video of the firm presenting at a conference that gives that pitch as an introduction.

It is probably just about highlighting what you think is relevant to the fund you’re targeting – and showing some availability.

Tell us a bit more about your approach to ESG

We’re trying to embed ESG into all aspects of our investment process and it’s what we consider one of the quality criteria for a company, in much the same way as you would look at whether a company has a competitive advantage.

We think ESG drives two things: better outcomes in terms of performance – revenue, growth, profitability, all that type of thing – and it also helps you avoid the blow-ups. For us, if you don’t have good governance, it’s very hard to be good on [social and environmental] so governance gets a slight overweight from that perspective. But we also tend not to pigeonhole governance. Instead, we try to review everything and ask: is there an overall problem here?

Are you generally happy with the quality of ESG reporting you see?

I think it’s getting better. We tend to invest in companies that have high standards already so their level of reporting tends to be very good. I’m amazed at what some of them have been able to do. Then we’ve had engagement with other companies where they put out their first sustainability report and that’s a great thing. So we’ve given them feedback: what we’ve liked about it, and then potentially some areas where we would have thought we’d see information, but didn’t.

Is there a lot of work to be done, though? Absolutely. I guess we have the luxury of being able to take what we see as relevant for us and use it – and then engage with companies for more information when we need to.

Do you vote your international proxy?

Yes.

Do you need to meet with senior management?

We do need to meet with the company but that doesn’t have to mean the CEO or CFO. Because of our size, I think we’re quite conscious that we’re probably never going to meet with [Amazon’s] Jeff Bezos, for example.

And it doesn’t have to be a one-on-one meeting. At the very least, however, we would want to have some form of engagement with IR and if we’d held a large position for a long time, I think it’d probably be a concern for us if, at that point, management didn’t meet with us.

Tell us about some of the holdings you’re excited about?

Electronic Arts (EA), Dollar General and Becton Dickinson [are companies] we see as long-term franchise businesses that have performed really well through Covid-19.

They have sustainable competitive advantages, be that in the form of intellectual property, as is the case with EA, which has years of gaming intellectual property and licenses around the FIFA franchise, for example. Becton Dickinson is in the number one or number two position across a broad array of healthcare consumables, and Dollar General is a best-in-class discount format retailer. [These companies] have seen really resilient growth that, [since] Covid-19, has accelerated.

I feel like the market is assuming that what [these companies] generated during Covid-19 is going to be taken away and forgetting that, actually, a lot of this should be sustainable. EA, for example, has brought a lot of new players into its system and you don’t lose those players: they might play a little bit less [after the pandemic ends] but the growth has been phenomenal – and when the next FIFA tournament comes around, annual gaming levels will likely revive [as they usually do around tournaments].

Becton Dickinson has Covid-19 testing and that’s really exciting, but a whole section of its business was also impacted by elective surgeries [being postponed] so next year earnings should be rebounding from that.

Dollar General is really resilient in a recession scenario, because it’s discount retailing. As people return to a reopening world, Dollar General still has physical stores, and it’s been rolling out more fresh products and more seasonal gifts and items for the home, particularly appealing to that segment of the market that gets stimulus checks.

All three companies are really durable franchises that are trading on really reasonable valuations.

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