Three funds investing in companies with pricing power

by | Jan 19, 2022

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With US inflation hitting 7% and UK inflation coming in today at 5.4% – its highest level since 1992 – both business margins and consumer spending power around the globe are being squeezed.

Here, Darius McDermott (pictured), managing director of FundCalibre, takes a look at the companies that do best in this environment – and the funds investing in them.

Pricing power

“As the cost of component parts, distribution and wages increases, some companies are in a better position than others to pass these costs on to the consumer – rising their prices without their customers switching or abandoning their products,” commented Darius.

“Essentials like food, drugs, power and even insurance are at the top of the food chain here, as we need them no matter what. But it also applies to some companies with strong brands that engender brand loyalty.”

James Thomson, manager of Rathbone Global Opportunities, added: “Recent surveys indicate many businesses plan to increase prices by significantly more than they plan to further raise wages, which should benefit those companies with pricing power. If these price rises stick and sales volumes remain robust, this could deliver some explosive earnings upside even though the journey toward them will be bumpy.”

Three funds investing in companies with pricing power

Threadneedle European Select
The investment philosophy of this fund is based on the premise that a company’s intrinsic value is determined by its growth, returns on capital, sustainable competitive advantage, and pricing power. The manager develops a thorough understanding of the industry in which a firm operates, the competitive landscape it is facing and the actions it is taking to improve its positioning. He will sometimes invest in stocks without pricing power – but only if the firm is the lowest-cost producer in the industry.  The three largest holdings in the fund are currently LVMH, Nestle and semiconductor company ASML*.

TB Evenlode Global Income 
The managers of this fund take a long term approach, focusing on quality, cash-generative businesses. They define quality companies as those with three characteristics: asset-light business models; high barriers to entry which can’t be disrupted easily; and finally, their customers’ decision to buy their product or service should not be determined completely by price. The team then selects stocks for the portfolio based on valuation and dividend yield. The top three holdings currently are Procter & Gamble, Wolters Kluwer and RELX*.

TB Amati UK Smaller Companies 
This fund focuses on structural growth businesses, which the managers believe can add value in the under-researched small and mid-cap part of the UK stock market. The process begins by filtering out FTSE 100 and investment companies. The managers then look for companies with following attributes: barriers to entry; a competitive advantage; revenue visibility; pricing power; sustainable growth; an adequate balance sheet and the ability to finance growth; incentivised management with a good track record; and takeover potential. The top three holdings are OSB Group, Accesso Technology and Atalaya Mining*.

*Source: fund factsheet, 30 November 2021

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