Global best in class equities for long term gains

Funds Management

by Carolyn Herbert

Transcription of Finance News Network Interview with Intermede Investment Partners CEO & Portfolio Manager, Barry Dargan.

Myooran Mahalingam: Welcome, my name is Myooran Mahalingam, Global Equities Portfolio Manager from MLC. It’s my great pleasure to introduce Barry Dargan, Chief Investment Officer of Intermede Investment Partners here in Sydney. Barry, thank you for joining us and coming all the way from London.

Barry Dargan: My pleasure.

Myooran Mahalingam: Barry, perhaps we can start off by you outlining how you manage money at Intermede Investment Partners.

Barry Dargan: Intermede was set up about three years ago, working with a small team of focused individuals who look at stocks on a long term fundamental basis. Our approach is to find companies that we think can deliver long term compounding growth in returns and earnings for many decades to come. Companies that really have a sustainable competitive advantage, excellent management and great business models; and that’s really what we are looking for in a concentrated portfolio of these best-in-class companies globally.

Myooran Mahalingam: And Barry this is an approach which you have been following for multiple decades now?

Barry Dargan: Indeed, yes. I began managing money in 2001 as a portfolio manager and employed that process and that style and it has worked well since that time and prior to that I was an analyst again using that kind of process that delivered good results.

Myooran Mahalingam: Tried and tested in different geographical locations as well?

Barry Dargan: Absolutely, yes in Asia and Europe and now also in the US and globally and many different markets and environments over that period. Good times and bad times.

Myooran Mahalingam: Markets performed very strongly in 2016, how has that impacted your portfolio and perhaps you can talk about some of the opportunities you are seeing today?

Barry Dargan: 2016, was a somewhat unusual year, that we had a very sharp re-flation rally which was lead by cyclical names and financial stocks that were anticipating higher interest rates. We saw that as very much a onetime re-rating in these names and towards the end of 2016, they became very expensive relative to the average stock. A little bit like the 1999 peak in the tech sector and we’re now starting to see that unwind which has given us a good tail wind as we go into this year as some of the company’s stocks that were left behind are starting to perform in a very good way.

Myooran Mahalingam: And what do you think differentiates Intermede Investment Partners from other global equity managers?

Barry Dargan: We are very focused on what we do. We just run the one strategy. We employ the one process that has been used for a long time with success. We are a team that has worked together for quite some time. It is an employee, majority owned business which obviously gives us huge incentive to see the business succeed but we also have the backing of the major financial institution behind us which is a minority owner in the business.

Myooran Mahalingam: And I suppose taking a long term investment horizon also helps you in terms of formulating the right decisions?

Barry Dargan: We think so. We think you can get caught up in all sorts of gossip about the market on a short term basis and what’s going to outperform this quarter or that quarter. That’s not what we do. We try to exe out that noise and we are looking for really truly long term growth names that are going to deliver on a compounding basis over many, many years. And if you take a longer term basis and own those kinds of companies, they are going to come good for you.

Myooran Mahalingam: Can you talk about a name in the portfolio that particularly excites you?

Barry Dargan: Yes, so all of our portfolio’s high conviction names that we own, we own a very small number of names, the best 40 or 50 names that we think exist in the world. But if I had to think about one in particular that comes to mind, I’d say that would be Alibaba. It is the leading internet/e-commerce play in China. It has a dominant market share in both the C and the B2B space. Market share is in the 60 to 70 per cent space. It is hugely cash generative because it doesn’t take any inventory positions and has very high margins. It’s growing at a very rapid pace. China seems to have not developed the retail infrastructure of bricks and mortar style that many other countries have, it has gone straight to e-commerce so if you want to sell brands into in-land cities, Tier 2 and 3 cities, you need to do it through an e-commerce platform and Alibaba really is the only way to do that. They also have like an Amazon web service style data platform that they are rolling out to corporate in China and corporate in China must keep their data in China so it’s the leading play in that space growing very rapidly as well and it also has the leading e-commerce play in south-east Asia through its holding in Lazada, which we are now starting to see built out as well. So we see a multi-year growth opportunity with this company and we think it’s actually not that expensive when you look at it on some measures such as unlevered free cash flow.

Myooran Mahalingam: And with stocks like Alibaba, they don’t go straight up, there are pockets where the stock retraces. Can you talk me through your response and reaction in those situations, where the stock actually sells off?

Barry Dargan: We actually see those kinds of pullbacks as great opportunities to add more to a position that we have very fundamental long term conviction in, but we think the market is missing the point or undervaluing it relative to its intrinsic value. So if we see a pull-back in a high quality name like that we will definitely add to it.

Myooran Mahalingam: Barry Dargan, thank you very much indeed for your time.

Barry Dargan: Thank you very much.