David Dudding, manager of the Threadneedle Global Focus Fund, explains how his team seeks out companies with a durable competitive advantage
When selecting stocks for the Threadneedle Global Focus Fund, Columbia Threadneedle's global equities team look at each company's ‘economic moats', a framework that evaluates the sources of competitive advantage, whether it be intangible assets; network effects; scale; switching costs; and/or cost advantage.
They combine this with Michael Porter's classic Five Forces - factors ranging from the threat of new entrants to the power of suppliers/customers - to evaluate the durability of a company's competitive advantage, helping them to identify those companies that can maintain strong fundamentals and that can compound growth over the medium to long term.
David Dudding, manager of the Threadneedle Global Focus Fund, explains that the network effect is in his view the best competitive advantage, which leads the team to invest heavily in internet and software companies.
This two-pronged framework for assessing competitive advantage means the fund can be much more diversified than a traditional quality vehicle, as the team is able to look for returns in areas that quality funds would naturally discount.
Dudding says: "As a straightforward quality fund, you'd be less likely to own a bank, because they are very leveraged, or biotech, for example, because they don't make any money. So it precludes quite a lot. Rather than being pure quality investors, we would say we spend more of our time looking at stocks with a competitive advantage."
The key, however, is that the company must be improving, whether that be in terms of traditional quality metrics, or on the ESG front.
The global nature of the fund allows Dudding and his team to create a more diversified product, despite the vehicle being relatively concentrated with typically between 30 and 50 holdings. Dudding describes this as a "one-stop-shop" for investors who don't wish to pick best of breed regional or sector funds.
Underpinning this is the expertise of Columbia Threadneedle's wider analyst team, which feeds into the idea generating process for the vehicle. This is particularly helpful, since some industries require more local knowledge than others, one example being banks. This is a key area where the fund differentiates itself from quality peers, particularly within emerging market financials, which can demonstrate a strong competitive advantage in their respective markets.
Dudding adds that "different parts of the world are better at different things". For example, he prefers luxury goods and consumer staples in Europe, while he thinks the best IT opportunities are to be found in the US.
To find out more about how the team hunt out firm's with the strongest competitive advantage, click here.
This article was funded by Columbia Threadneedle Investments.
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