Chris Hohn makes the case for stable, consistent, inflation-beating long-term returns in global equities
There are not many safe places left to put your money and earn a decent return. Interest rates are low, and while gold is nice to look at it generates no income. But a crisis creates opportunities, and we can see plenty.
The Children’s Investment Fund (TCI) is a value-oriented fundamental global equity fund that runs a highly concentrated portfolio of twelve high-conviction positions. We focus on industries with very high barriers-to-entry and companies that have extremely predictable long-term earnings and trade at a significant discount to intrinsic value.
In this environment, the stocks we describe here will offer compelling returns versus cash and government bonds, and provide inflation protection for wealth.
Enagás supplies gas to the people of Spain. It is growing revenues at 8 per cent and earnings at 10 per cent and pays a dividend of over 6.5 per cent. The business is backed by a huge asset base, earning a predictable, inflation-linked return. It is a monopoly that cannot be disintermediated. The stock trades at eleven times earnings. We think it should provide investors with a return of close
to 20 per cent.
Japan Tobacco is one of four dominant global companies in the industry. Smoking may not be popular with many — but smokers do not stop just because the economy is languishing.
Japan Tobacco has a huge market share in its local market and has exposure to the fast-growing markets of Russia, Taiwan and Turkey. The company is growing by 12 per cent, has pricing power, generates huge amounts of cash — and pays out to shareholders. The stock trades on only thirteen times earnings.
Safran is French, so you might think it would be struggling to survive — but it is growing revenues by 10 per cent.
Safran makes every engine on a Boeing 737 and about half on the Airbus A320. The engines slowly wear out, providing a steady stream of demand for spare parts. With an installed base of over 18,000 engines that stay ‘on-wing’ for 25 years, the company has highly visible cash flows for many years to come. The stock trades on a PE ratio of only thirteen times and has a dividend yield of 3.5 per cent. This is a very low valuation.
Walt Disney’s theme-park business is only 20 per cent of profits. Most of its earnings is generated from its cable TV franchise, which includes ESPN.
It is a very stable business that generates predictable subscription revenues from cable distributors and has tremendous pricing power. In January, Disney raised its prices to its biggest customer by 30-40 per cent, which should help it grow its operating profit by 10 per cent per annum for the next seven years. Disney trades on fourteen times 2014 earnings, but we think it should trade up to at least its historic valuation band of 16-18x. The lower end of this band would give a one-year return of 23 per cent, including dividends.