Shai Patel, co-founder of financial advice firm Generation Financial Services, gives his verdict on the Investec GSF Global Franchise Fund.

This Luxembourg-domiciled fund aims to achieve long-term returns by investing in a concentrated global portfolio of between 20 and 45 high-quality companies selected for the quality and value of their franchises, and which are attractively valued by the market.

The companies in which the fund seeks to invest typically have dominant ‘intangible’ assets such as strong brands, patents, licences and copyrights, and are well positioned in stable or growing industries, with high barriers to entry and low capital intensity.

These characteristics may offer investors good long-term returns with lower than average absolute volatility.

Shai Patel says:
The Investec Global Franchise Fund – a rebranding of the Investec Global Select Equity Fund – is run by Sam Houlie, head of equities for South Africa, and although the fund is unconstrained to any benchmark, it can invest in any size company, sector and location.

The aim is to outperform the MSCI World Index. Overall, the main emphasis for the fund is to invest in the highest-quality companies, with strong global brands or franchises. Despite the prospectus confirming the ‘go anywhere’ status of the fund, its objectives suggest there will be a natural bias to the very largest, Western-based, companies with high barriers to market entry, such as Nestlé, Proctor & Gamble and Heineken. Given that many of these companies are beginning to find it harder to increase revenues from their naturalised Western markets, they will be very much reliant on emerging markets for increased sales figures over the coming years.

However, this remit has provided good opportunities over the past nine months as the equity rally since March has been largely led by lower-quality stocks, resulting in a valuation gap relative to perceived higher-quality stocks, and over the past couple of months the fund’s bias to these larger, quality companies has seen the tide turn in its favour.
Investors have begun looking to lower-leveraged, cash-generative businesses, and it is also possible that this trend could continue over the coming months as news emanates of the problems in Dubai, and reports suggest a tough year for global stock markets and economies in 2010.

Given the objectives, and subsequent large-cap bias, the fund should be fairly defensive in nature (66 per cent is invested in consumer staples and 16 per cent in healthcare) and would fit nicely into a lower-risk portfolio, providing strong elements of diversification and where the intention is to invest for longer-term growth.

As past performance suggests, while the fund will always follow general stock market movements, it should outperform relative to a bear market, but lag a strong rally.