Globally Diversified in Industry Leaders
PGIM Jennison Global Opportunities Fund
Author: Ticker Magazine
Last Update: Jul 25, 12:19 PM EDT
|As economies around the world become more interconnected, local companies can accelerate on the path of regional or global leadership with the right kind of products and management preparedness. Thomas Davis, co-portfolio manager of the PGIM Jennison Global Opportunities Fund, explains how the team’s high-conviction, concentrated strategy seeks the best ideas globally.
“Our goal is to put together a collection of select, unique, differentiated securities that are market leaders in their respective industry. Typically, these companies have sustainable competitive advantages that continue for years.”
Q: What is the history of the fund?
The fund was incepted on March 14, 2012, but the strategy dates back to 2004. At the time, we wanted to create a global strategy, because we were starting to see a lot of opportunities that were more global in nature. Different elements of the economy were effectively globalizing. U.S. companies were taking their business, products and services abroad, and many non-U.S. companies were bringing their products and services into the U.S. market.
We manage a concentrated portfolio with the goal to invest in our best global ideas and to express these convictions in meaningful ways. Another important aspect is that we have intentionally designed our fund to be as unconstrained as possible. The only constraint is that no single position can grow larger than 10% of the assets. It is a high-conviction, concentrated strategy, which allows us to seek the best ideas globally and to combine them into a portfolio of unique and differentiated securities.
Q: What is your investable universe in terms of geography and market capitalization?
The portfolio literally goes anywhere, so our geographic footprint is the world. We are a bottom-up fund and we have no top-down influences or biases. We find our opportunities and holdings one stock at a time, so our exposures are the result of our bottom-up process. It all depends on where and when the opportunities arise and where the profit pools are.
In terms of capitalization, we consider investment opportunities with a market cap of more than $1 billion, but we typically invest in companies with a minimum between $7 billion and $10 billion for liquidity reasons. We seek upcoming opportunities or companies that offer a unique product or service that can grow in size steadily and quickly. Currently, we are skewed to the large and mega-cap areas, while in the past we’ve had greater representation in mid-cap names.
Q: Would you describe the core beliefs that drive your investment philosophy?
First and foremost, we are growth investors, and we stick to who we are and what we are good at. Although the names change over time, the characteristics of the portfolio remain similar and consistent. The growth rate and price-to-earnings always show a growth portfolio, even as the names change.
Our goal is to put together a collection of select, unique, differentiated securities that are market leaders in their respective industries. Typically, these companies have sustainable competitive advantages that continue for years. They may have patent protections such as might be found among pharmaceutical companies, or a proprietary technology like the iOS of Apple, or a scale effect like Netflix, which has a rapidly growing subscriber base that provides a monthly revenue stream, that can fund incremental content to draw in more subscribers. These are long-term sustainable advantages that we love.
Q: Are there certain areas or sectors that you find attractive?
We source ideas largely from the technology and the consumer areas because that’s where the innovation and creativity are. Tech and consumer products and services are being designed, built and offered to the marketplace on a global basis.
We tend not to find ideas in the energy and materials sectors or in coal and oil companies, where the underlying product is the same, regardless of who is extracting it out of the ground. Also, we don’t find opportunities in utilities and even in the telecom sector. Financials have become increasingly difficult because of the political and capital pressure in many parts of the world. There’s just not a lot of creativity, innovation and profit generation in these areas.
As a result, our exposure today comes largely from the consumer and technology sectors. Fortunately, both of these sectors are highly diverse, with many embedded sub-industries. Despite the concentration of the strategy on the surface, it is still a diversified portfolio of business models and consumers served by a wide range of companies.
Q: How do you transform that philosophy into an investment process?
The process starts with our research team, which is responsible for almost all idea generation. We have an experienced team of 15 analysts, who are experts in their fields, with average experience of 20 years. They are specifically focused on growth portfolios.
Our analysts travel the world on a regular basis to meet with companies, suppliers, customers and competitors, both upstream and downstream. Based on this groundwork, we identify the opportunities that have the best likelihood to generate outsized revenue and earnings growth within their respective global industries.
When they identify an opportunity, they’ll do a full analysis to identify the quality and unique aspects of the opportunity, what makes this product or service special, and what the total addressable market could be over time.
The next step of the analysis is valuation. The valuation metrics vary depending on the sector and the industry, but the goal is to develop a reasonable estimate of fair value or a range of fair values depending upon assumptions. By the time the analysts come to us, we all have a good sense of the overall opportunity, the assumptions, and the potential upside in earnings and return.
Q: How do you evaluate two similar investment opportunities?
It depends mostly on the type of business and the addressable market and the potential growth rate of the opportunity. For instance, if a company in Mexico has a product or a service that is sellable across South America, while a Thai company has a product that is specific to Thailand, we might choose the Mexican company because of the larger growth opportunity. On the other hand, if you have a company selling products globally under consideration, we might choose that one because it has the larger addressable market.
If two companies are very similar, we will choose the most promising opportunity, but not both. Since we have limited spots in our concentrated portfolio, we make sure that our names are as differentiated as possible.
Q: What financial metrics do you focus on?
We look for top-line growth because it signals a product or a service that’s clearly in demand. However, we need to understand the roadmap from revenue down to profit and loss, and how long it would take for that revenue growth to work its way down into earnings. We need to understand the P&L lifecycle. If an opportunity cannot translate into earnings, returns and free cash, then it is not good for us.
That said, we can’t be entirely focused on earnings, returns and free cash flow up front. If we were, we might be missing out on innovative companies investing in the earlier stages of expansion and growth of a terrific product or service. Ultimately, all the metrics are important. They may not all show up at the same time. Sometimes the best earnings, returns, and free cash may not show up until the medium term, but that doesn’t mean we wouldn’t want to own the company today.
For example, Netflix and Amazon are not incredibly profitable today, but they generate tremendous top-line growth and are expanding their active user base. Over time, we believe that will eventually translate into earnings growth and cash flow generation.