M&G Global Leaders - research update

Richard Troue | Fri 27 March 2015

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Most businesses go through good and bad times. Aled Smith, manager of the M&G Global Leaders Fund looks for those which have gone through a challenging period, but have the potential to recover; or those changing for the better. This could be change at a management level, or a change in the businesses strategy, for example.

Ultimately, he is looking for businesses capable of improving 'returns on capital' - in other words, using the money invested in their operations more effectively. This approach involves focusing predominantly on the prospects for individual companies, rather than forecasting the economic outlook. At present, he is finding a lot of opportunities among Japanese companies, which he suggests are making great strides in improving corporate governance and shareholder returns.

Toho, for example, is a Japanese pharmacy and pharmaceutical wholesale business. It is in the process of changing the way it charges customers and making operational improvements to reduce waste and improve efficiency. These measures are starting to improve profits, but Aled Smith believes there is more to come. It is one of the fund's largest overweight investments and features in the top 10 holdings.

Elsewhere, the manager is also positive on the prospects for certain European banks. Well-publicised troubles in Europe have taken their toll and some are trading below their 'book value', according to Aled Smith. This means current share prices are implying banks are worth less than the total value of their assets, and could be considered good value.

The manager cites Intesa Sanpaolo as a bank he believes can deliver significant returns as the European economy recovers. It is based in Italy and was not as stretched as other banks going into the financial crisis, leaving it in a stronger position to benefit from any recovery.

Another European company Aled Smith is positive on is Renault, the French car manufacturer. It has implemented a new manufacturing style, which has a greater focus on high quality, efficient production and the constant pursuit of improvement. It has also disposed of non-core operations, including an interest in the loss-making Volvo brand.

Overall, the past year has been challenging for the fund and a number of factors have contributed to lacklustre performance. This includes a bias to 'value' stocks when 'growth' stocks have performed better, a bias to higher risk small and medium-sized companies when larger companies have been in favour, and less exposure to the US than the benchmark index at a time when the American stock market has performed well.

Since he assumed responsibility for this fund in September 2002, Aled Smith has comfortably outperformed the average fund in the IA Global Sector, but has only managed to perform in line with the MSCI AC World Index. While performance was good in the period up to the middle of 2007 the fund has since underperformed although past performance should not be seen as an indicator of future returns.

Performance of the M&G Global Leaders Fund since the manager took over

Past performance is not a guide to future returns. Source: Lipper IM. *Figures to 02/03/2015.

Our view on this fund

All fund managers experience periods when their approach is out of favour. We view the approach of seeking companies undergoing positive change and improving returns on capital as sensible. However, our analysis suggests poor stock selection has contributed to lacklustre performance in recent years and on balance we believe other funds in the sector have superior long-term prospects. For details of our favourite global funds, please refer to the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.