By Philip van Doorn, MarketWatch
What should a manager of funds that invest around the world do during a lingering disagreement between the U.S. and China? For Brian Beitner, managing partner of Chautauqua Capital Management, the answer is to avoid making investments that assume a favorable outcome for trade negotiations.
During an interview, Beitner named three companies he believes have business models that give them the advantages they need to thrive during a long period of trade tensions or even a recession. He isn’t counting on successful trade negotiations, and in his second-quarter market performance review called the combination of high debt levels and very low interest rates in the developed world “worrisome.”
Chautauqua Capital Management is a subsidiary of Baird Funds, based in Boulder, Colo., with about $600 million in assets under management in mutual funds and private accounts.
The Chautauqua International Growth Fund /zigman2/quotes/203948824/realtime CCWSX +1.70% /zigman2/quotes/209365367/realtime CCWIX +1.62% has $155 million in assets and a three-star rating (out of five) from Morningstar. The Chautauqua Global Growth Fund /zigman2/quotes/200950185/realtime CCGSX +1.28% /zigman2/quotes/203951792/realtime CCGIX +1.28% has $50 million in total assets and a four-star rating from Morningstar. Beitner oversees both funds, which each hold only a few dozen stocks.
The two portfolios are managed the same way, except that the Global Growth Fund includes U.S. stocks, which made up 41% of the portfolio as of March 31. This explains its better performance. Total returns and expense figures for both funds are below.
Three examples of companies with business-model advantages
Beitner said he and his team screen stocks using a wide range of criteria, which helps them overcome “time-tested bias” and helps identify industries they may have overlooked. He said a typical sweet spot for new investment is “companies at the lower end of large-cap,” that have moved through the “higher-risk small-cap phase, are large enough to defend themselves and are increasing their market share from 10% to 15% [annually] to eventually dominate their industry with maybe a 50% market share.”
That said, Beitner is certainly willing to hold a successful company for a very long time, and even after it has grown way beyond the “lower-end of large-cap.”
The Chautauqua International Growth Fund typically holds about 30 stocks, while the global fund (which includes U.S. stocks) holds about 40. But the funds are even more concentrated than those numbers indicate, as the 10 largest holdings typically make up 45% to 50% of the portfolios, Beitner said.
Beitner discussed three companies held by both funds. Here they are, with total returns and sales-growth figures:
|Company||Ticker||HQ Country||Industry||Total return - 2019 through July 12||Total Return - 3 Years||Annual sales growth|
|ASML Holding NV ADR||/zigman2/quotes/210293876/composite ASML||Netherlands||Electronic Production Equipment||35%||112%||28%|
|Temenos AG||/zigman2/quotes/207982992/delayed CH:TEMN||Switzerland||Information Technology Services||48%||244%||14%|
|BYD Co. Ltd. Class H||/zigman2/quotes/206867707/delayed HK:1211||China||Motor Vehicles||-4%||2%||26%|
The sales figures are for the most recently reported fiscal years.
You can click the tickers for more about each company. The tickers in the table are those held by the Chautauqua International Growth Fund and the Chautauqua Global Growth Fund. For ASML, the funds hold the American depositary receipts. The funds hold the locally listed shares for the other two. The ADR for Temenos is /zigman2/quotes/210185457/composite TMSNY +0.21% and the ADR ticker for BYD Co. is /zigman2/quotes/210293876/composite ASML +0.16% .
Here’s a summary of opinion for these three stocks among sell-side analysts polled by FactSet:
|Company||Ticker||share 'buy' ratings||Share neutral ratings||Share 'sell' ratings||Forward price/ earnings ratio|
|ASML Holding NV ADR||/zigman2/quotes/210293876/composite ASML||69%||25%||6%||25.9|
|Temenos AG||/zigman2/quotes/207982992/delayed CH:TEMN||33%||27%||40%||51.3|
|BYD Co. Ltd. Class H||/zigman2/quotes/206867707/delayed HK:1211||50%||12%||38%||33.3|
The forward price-to-earnings ratios are based on closing prices on July 12 and consensus earnings estimates for the next 12 reported months.
ASML Holding NV /zigman2/quotes/210293876/composite ASML +0.16% is a Dutch semiconductor manufacturer with a stock-market value of $78.6 billion. Beitner first bought shares of the company 13 years ago, and has scaled in and out at various times, depending on its valuation. The company manufactures equipment used by its customers, including Taiwan Semiconductor /zigman2/quotes/204359850/composite TSM -1.20% , Samsung /zigman2/quotes/209800866/delayed KR:005930 +1.93% , Intel /zigman2/quotes/203649727/composite INTC -0.29% and other companies to make computer chips. It has a tremendous advantage in photolithography, through which its equipment can make circuit patterns as small as seven nanometers in size. (A nanometer is a billionth of a meter.)
Beitner called ASML “a poster child” for his management style, which is to concentrate portfolios of “great wealth-generating companies that through business-model advantages dominate industries that are growing rapidly.”
Chautauqua Capital Management
“If you have a company like ASML that is mission critical to its customers, be they Taiwanese, American or Chinese, no matter the trade tensions, they are going to get orders,” he said, adding that “the mission-critical nature of the business enables them to overcome any geopolitical machinations.”