Simon Fennell, Co-Manager, William Blair International Growth Fund
Simon Fennell: The approach of the International Growth Fund is to look for the best companies we can find with a focus on quality. What we mean by quality is a heavy emphasis on cash return on invested capital, which we believe is the best metric. We look for companies with the best sustainable business models, positions and franchises. We assess the management profile, the business model, and seek companies that have higher sustainable returns. We believe that focus leads to portfolios with very good businesses that can benefit in up markets, but also protect investors in down markets. That is one of the areas that we're particularly focused on from a risk profile point of view within the portfolio.
Wally Forbes: I see. In your International Fund, do you go into U.S. stocks as well as stocks that are non-U.S. stocks?
Fennell: No, everything is outside of the U.S. We do have global strategies at William Blair, but the International Growth is non-U.S.
Forbes: Understand. Please go right ahead.
Fennell: Well, I wanted to discuss three or four names as examples of the holdings in the portfolio at the moment.
Forbes: Are these available in the U.S. through ADRs or otherwise?
Fennell: Yes, all of these have a U.S. listing as well, although some are more liquid than others. The first is ARM Holdings ARM Holdings (NASDAQ: ARMH) based here in Cambridge, England. It is the global leading mobile intellectual property company with a huge market share within mobile technology. It has been a name that has defined mobile technology for almost ten years, and we believe it still has significant growth potential from here. We believe margins still have substantial upside potential — even though it currently has high margins. We believe that earnings growth can be north of 25% for multiple years.
From a cash return point of view, as ARM starts to increase its licensing and royalty payments we believe that there can actually be some very significant upside potential. The issue with this company is not its market position, but much more the valuation, which is particularly high. That is a tradeoff that we often struggle with, although given its market dominance and high cash returns, it remains an incredibly interesting, innovative, and important company.
Forbes: So, it's good despite the fact that it's at a high multiple at the present time?
Fennell: ARM has always traded at a very high multiple, and the main reason for that is just that its future cash flows are very visible and because of the payments that it is gaining from licenses. It will derive royalties on products that don't come out for two, three, or four years. As a result, the nature of its business model is particularly long-term. It has a high multiple because investors believe that they can see growth for some time to come, but we believe that the return sustainability is also very significant.
The second name I wanted to highlight is ITV ITV (OTC: ITVPY), the U.K. TV company. ITV is an integrated media company with both production and transmission. It is quite an interesting story from two or three points of view. The first reason is the current management team led by Adam Crozier and the Chairman, Archie Norman. They have really turned this company around both operationally and financially.
The return profile makes it interesting as both a cyclical and something of a structural story. Three-quarters of its revenue comes from transmissions, with a basis on the advertising side and a quarter is coming from its production group. To have that sort of internal production capability is very interesting, but even more interesting is the fact that ITV is starting to export TV programs almost on a global basis. It is also doing some very interesting M&A work around the world, to pick up companies that it can take in-house and then push those products out on its platform across the world.
Forbes: So, it doesn't just operate in the U.K., it is international?
Fennell: Very much so. It takes original U.K. programming and then exports it on a global scale. Some of the programs that it is exporting are very interesting, as programs like Titanic or Mr. Selfridge have been pushed around the world. There have also been some interesting mergers and acquisitions in the U.S. This is the company that bought the production group that does the Duck Dynasty TV show which has, of course, tremendous popularity in the U.S.
Again, what ITV is trying to do is take some of these formats and then export them. ITV is also benefiting from an advertising upswing. Here in the U.K., the economy is getting a little bit better, and it is a beneficiary of that. ITV has paid down a lot of its debt, is very cash generative at the moment, and has highlighted that it is going to start buybacks and pay dividends.