16 July 2016
When you see this sort of phenomenon, it usually means investors must pay more attention to valuations.
Investors today are paying a full price for what they love, but there are some wide discounts on offer for companies out of favour.
For example, the forward P/E ratio of the consumer staples sector is at a 20-year high. The P/E of our Fund is consistently much lower, and the gap has widened significantly over the last year. Free cash flow yields for most staples, such as Nestle, are trading in the range of 4-5% – not catastrophic, but still very low by historical standards.
But if you look wider, companies such as Microsoft and Oracle, as well as some healthcare services names, are offering free cash flow yields in the region of 6-7% or more.
Unlike many other strategies in this space, which hold significant positions in consumer staples, our largest exposure is healthcare.
Healthcare is a great demographics story, but it imposes a cost on society to deliver it. Our positions in are evenly split between pharma and biotech names, medical device companies and services businesses. While pharma companies are often blamed by politicians for increasing the cost of healthcare, services companies are part of the solution in keeping costs down – so we like to have a spread of names in our portfolio.