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The following paper is contributed by Wellington Management, the sub-manager of the United Global Durable Equities Fund. All views expressed are based on available information as of the date of publication.
The United Global Durable Equities Fund is based on the Wellington Durable Enterprises Strategy (the "Strategy”). The Strategy is a global equity approach managed with an absolute return mindset. The Strategy seeks a total return by investing in companies that are more stable than market perceives.
Why Durable Enterprises?
Durable enterprises are companies that could generate resilient earnings, irrespective of the broader economic environment. Wellington believes that stable companies have the potential to outperform with less risk overtime, especially when the market underappreciates their reliable qualities.
The Strategy is focused on owning a set of businesses that possess three key characteristics:
Stable and resilient earnings
Wellington defines stability as a profit base that is unlikely to decline, and the creation of value through prudent use of capital. In general, industries with steady competitive dynamics, limited economic sensitivity, and long product cycles are conducive to stability. Businesses within these industries may potentially deliver consistent profits through good management practices such as cost control and skilled execution.
Moderate Valuation
Central to Wellington’s philosophy is the belief that stability is not always reflected in the valuation of a stock. The Strategy looks at companies whose profile might not fit into traditional growth, quality, or value buckets. They normally have single-digit organic growth and are rarely in distress or out of favour. As a result, these companies often fail to attract the attention of style-focused institutional investors and may trade at lower valuations than we believe their stability merits.
Businesses with excellent management skill
Within the universe of unconventional durable companies, Wellington looks for management teams that are likely to create long-term shareholder value through prudent capital allocation. Thoughtful allocations of capital have the capacity to translate a stable profit base into attractive long-term growth in earnings and/or dividends per share.
How is Durable Enterprises different?
To illustrate the durability and resilience of the businesses they own within Durable Enterprises, below Wellington shares two examples of unique companies with excellent management teams driving stable earnings growth and shareholder return in the face of uncertainty.
What are the key features of Durable Enterprises?
The idea of this portfolio came about when the portfolio manager, thought about how he would manage his mother’s retirement portfolio.
He envisioned a “sleep-at-night” portfolio that embodies these three points:
Why Durable Enterprises now?
Equity investors tend to consider high returns and downside mitigation to be mutually exclusive. The pursuit of high returns often drives investors towards growth or value disciplines, both of which can be volatile. The quest for downside mitigation often leads investors to blue chips, which have historically had less volatility but also less upside optionality in strong economic or market environments.
Looking ahead, Wellington believes we are in an environment of higher structural inflation, higher interest rates, shorter cycles, increasing geopolitical risk, and elevated uncertainty and hence higher volatility. In turn, Wellington believes these factors will lead to greater volatility in the earnings streams of companies, due to the unpredictability of input prices and more variability in economic and business cycles.
With this as the backdrop, it is reasonable to conclude that investors will develop a greater appreciation for stability and consistency in earnings over the coming years. In particular, earnings that prove to be resilient, irrespective of the broader economic environment. We see investors gravitating to less “exciting” businesses that are well run and businesses that can compound their earnings consistently through prudent capital allocation.
Wellington’s research indicates that attractive long-term risk-adjusted returns are possible if management allocates capital wisely and valuation multiples do not compress. Given the comparatively low level of business risk facing many stable companies, they believe their stocks offer a compelling risk/return profile.
The low overlap of characteristics with growth, value, or traditional high-quality equities also means that a portfolio of unconventional stable companies may provide diversification relative to more traditional allocations.
All information in this publication is based upon certain assumptions and analysis of information available as at the date of the publication and reflects prevailing conditions and UOB Asset Management Ltd (“UOBAM”)’s views as of such date, all of which are subject to change at any time without notice. Although care has been taken to ensure the accuracy of information contained in this publication, UOBAM makes no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for the accuracy or completeness of the information.
Potential investors should read the prospectus of the fund(s) (the “Fund(s)”) which is available and may be obtained from UOBAM or any of its appointed distributors, before deciding whether to subscribe for or purchase units in the Fund(s). Returns on the units are not guaranteed. The value of the units and the income from them, if any, may fall as well as rise, and is likely to have high volatility due to the investment policies and/or portfolio management techniques employed by the Fund(s)3. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product. An investment in the Fund(s) is subject to investment risks and foreign exchange risks, including the possible loss of the principal amount invested. Investors should consider carefully the risks of investing in the Fund(s) and may wish to seek advice from a financial adviser before making a commitment to invest in the Fund(s). Should you choose not to seek advice from a financial adviser, you should consider carefully whether the Fund(s) is suitable for you. Investors should note that the past performance of any investment product, manager, company, entity or UOBAM mentioned in this publication, and any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance of any investment product, manager, company, entity or UOBAM or the economy, stock market, bond market or economic trends of the markets. Nothing in this publication shall constitute a continuing representation or give rise to any implication that there has not been or that there will not be any change affecting the Funds. All subscription for the units in the Fund(s) must be made on the application forms accompanying the prospectus of that fund.
The above information is strictly for general information only and is not an offer, solicitation advice or recommendation to buy or sell any investment product or invest in any company. This publication should not be construed as accounting, legal, regulatory, tax, financial or other advice. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited, UOBAM, or any of their subsidiary, associate or affiliate or their distributors. The Fund(s) may use or invest in financial derivative instruments and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund(s)’ prospectus.
Wellington Management is the sub-manager and sub-investment managers of the United Global Durable Equities Fund. The views expressed here are those of Wellington Management’s portfolio manager(s) and should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management.
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