Since 2001, when Veritas began managing their Global Focus Strategy, which the Nedgroup Investments Global Equity Fund is based upon, they have outperformed their peer group by almost 4% p.a. which is outstanding.
Some of the key characteristics that Veritas typically look for include:
• Only invest in quality companies
• With distinct growth drivers
• That have barriers to protect future cash generation
• And can demonstrate high levels of recurring revenues and strong cashflow
Importantly, ESG (environmental, social and governance) considerations are a major factor in their investment thesis as there are often significant longer-term negative implications for companies who don’t follow global best practice.
US Cable Companies
Veritas use themes to identify stocks with long-term tailwinds. Charter Communications, currently the Fund’s largest holding, along with Altice USA, which is also one of the top 10 holdings, are part of the theme to benefit from the long-term growth of broadband provision by US Cable companies. If we consider the background process to purchasing these stocks, Veritas discovered many years ago that broadband was going to become a fast-growing and large revenue stream for these businesses, and that it would eventually overtake cable provision as the major contributor to their earnings.
Interestingly, broadband provision is a much higher margin business. Especially so because these companies don’t need to pay for content and because they can use the same cables that are already laid in the ground, which gives them an immediate and significant cost advantage versus newer competitors. Furthermore, data speed upgrades are now possible via software upgrades, which makes these businesses even more sustainable and “future ready”.
While the rest of the market was focusing on the continually declining subscribers to their traditional cable business over the past few years, Veritas could see that there was an investment opportunity in these stocks.
Healthcare is another significant theme, currently comprising just over a quarter of the fund. To be specific, Veritas are interested in “value-based” healthcare companies in particular. Through innovation, these companies are either taking costs out of the system to make healthcare cheaper for the end consumer or are providing products and services that are changing the game altogether.
Let’s take a moment to think about how we currently pay for healthcare. The more treatment a person receives, the more you are required to pay. This has very little to do with how effective the actual treatments are. At a high level, let’s break the process down into various components:
• Visit the Doctor
• Prescription for medication
• Blood and other tests
• Specialised scans
• Admission and stay in hospital for additional care
• Surgery, etc.
At each point in the above process, the patient is required to pay more for the additional treatment. Hence, the financial incentive to the Healthcare system is to provide you with more treatment, which could potentially be abused by unscrupulous providers. The objective should rather be to maximise the effectiveness of treatment while minimising costs to the end consumer.
Veritas have therefore been investing in a variety of companies that are focused on data science and artificial intelligence, from the maker of Botox to those developing specialised dentistry equipment, laboratory equipment, pathology and contact lenses. Interestingly, they also own shares in Abbott Labs which has made significant strides in developing a portable medical device to perform coronavirus tests within a matter of minutes.
Canadian Pacific Railway
Within the past year, Veritas bought into Canadian Pacific Railway and Svenska Handelsbanken for the first time. Canadian Pacific Railway is an unusual type of business for Veritas as it is very capital-intensive. Canadian Pacific focus on the carriage of goods only (no passengers) and their trains can be up to 2 miles long!
The business is the second largest railroad company in Canada and was probably the worst run railroad business in the whole of North America. The company operated very inefficiently, which created significant opportunities for improvement in profitability and cashflows. With the implementation of their new operating model, the speed of transportation services has improved by 75% on average.
Svenska Handelsbanken is the only EU bank on Veritas’ Universe List. Veritas has been monitoring the company for the past 9 years before their purchase. This also demonstrates how patient they are in their approach to investing. Importantly, the business itself is managed very conservatively and did not need to be bailed out during the Global Financial Crisis.
The Bank has had no money laundering issues (which has been rampant in Scandinavia and for which there is currently a massive anti-corruption drive) because their branch in Estonia has not been processing dirty money like Swedbank and Danske Bank (which have been making the news headlines for all the wrong reasons).
Svenska Handelsbanken has a different business model to other banks, for example:
• Lots of autonomy is given to the Branch Managers
• The Bank does not pay annual bonuses, with only a deferred bonus system in place
• Part of the corporate culture is to avoid taking big risks (employees are not incentivized to take large risks, even if there is potentially a large payoff)
• The Bank prefers slow and steady growth
Finally, it’s worth mentioning that the business is well-managed with a strong balance sheet.
In this article, we’ve discussed Veritas’ approach to managing money, some of their top holdings and themes as well as new ideas within the portfolio. Please contact us if you would like to have more information on any of these topics.
We also recently interviewed Andrew Headley, Portfolio Manager of the Fund on their actions during the sudden market reversal in March. The link to this recording can be found here: https://www.youtube.com/watch?v=W5OBTKAa1S0
The Nedgroup Investments Global Equity Fund has an exceptional long-term track record and Veritas is well-known and respected amongst South African financial advisers making it an attractive value proposition for investors.