Don't forget your toothbrush

Our first presenter today is Elissa DiMarco, Investment Director at Magellan Asset Management.

Elissa joined Magellan in 2015 with responsibility for research coverage in the financial sector.

Prior to this, Elissa spent two years as an analyst at APRA and also worked at Macquarie Group as an equity analyst.

Her presentation topic today is, don't forget your toothbrush.

Very interesting.

Welcome to the presentation, Elissa.

Thanks, Angelina.

Great to be with you today.

So today we're going to be talking about the importance of including defensive stocks in your portfolio, but not just any defensive stocks, quality defensive stocks that will enable you to generate attractive returns for decades to come.

Defensive growth companies play a crucial role in the portfolio, complementing the higher growth and higher risk technology.

Defensive growth companies allow you to compound your wealth with a high degree of certainty, reducing the risk to the downside.

Hopefully by the end of today's session, you'll agree

that one should never forget their toothbrush when it comes to investing.

Markets over the last five years have been dominated by technology stocks, the best performing sector in the market.

Whilst earnings growth within the technology sector has been and is expected to be strong, it doesn't mean that the less discussed sectors don't present opportunities in your portfolio.

So as investors we want to be maximising the return for a level of risk.

We want to grow our wealth with a high degree of certainty.

Benjamin Franklin is famous for saying that in this world nothing can be certain except for death and taxes.

However we can probably add a few more things to that list, be it consume food, clean our houses or look after our health.

These then create incredibly stable demand from consumer staples and healthcare sectors.

Reliable and defensive growth, growth that we have a high degree of conviction in the range of outcomes regardless of the economic cycle.

As you can see from the charts on the slide, at home consumer food and beverage industry has grown steadily at around 5% per annum over the last 60 years and healthcare spend at over 8% per annum for 60 years.

This reliable growth means that earnings for companies in these industries is also more reliable.

The beta for consumer staples companies is at around 5.6 and healthcare at about 8.6, lower risk than the market.

So as we like to say at Magellan, don't forget your toothbrush, even when it comes to investing.

Over the past 30 years, healthcare and staples companies have delivered returns greater than the index and at a lower risk.

And as we'll now demonstrate, when you select quality companies within these sectors, the returns are even stronger.

But how is it that you find the best companies, the highest quality companies?

How do we identify which consumer companies are masters at driving consumption?

So as an active manager we're actively deciding which companies to invest in.

In the case of the consumer staples sector we need to decide which of the more than 100 stocks in the consumer staples universe we should be investing in.

This is an incredibly important step because in a typical index the median company underperforms so there's a lot to gain then from picking the winners versus just buying the index with certainty.

So how is it that we pick the winners you might ask?

It's fundamental research.

That's what's critical.

This increases the likelihood of picking the structural winners.

At Magellan we apply our investment philosophy.

We're identifying companies that have a competitive advantage.

In the case of the consumer staples companies we're typically looking for companies that have a strong brand, pricing advantages and a favorable industry structure.

These are critical.

First on the power of the brand.

This often then enables a company to have pricing power.

This is incredibly important because it reduces the risk of volume loss when you're passing on, for example, the cost of inflation or pricing for innovation.

Coca-Cola's brand is synonymous with being refreshing and thirst-quenching within the beverages space.

During the post-COVID period of higher inflation, Coke was able to pass on the inflation pressures.

We're also looking for companies that have scale advantages.

These scale advantages could be in manufacturing or in distribution.

They enable a company to be the lowest cost producer and have greater bargaining power with distributors and protecting their margins, which is incredibly attractive for investors.

We're also looking for companies that operate within a consolidated industry structure.

This is key because it makes it harder for new entrants to come in.

Coke and Pepsi have the leading market share within the carbonated beverage industry.

And then with innovative management and strong marketing, it makes it really challenging to displace Coke.

So hopefully you've realised as we've been talking here to make these determinations, fundamental research is critical.

Historical data only tells you where a company's been, but not necessarily where they can go into the future.

These competitive advantages will enable a company to protect and grow earnings into the future, often taking share from competitors.

From the consumer staples lens, generating strong and predictable cash flows is incredibly important.

It will compound returns with a high degree of certainty.

So now we're going to unpack some of the secret sauce that we're looking for within the consumer staples space.

looking at how a consumer staples company can maintain their brand, their scale advantages and their place within an industry structure.

That is, how do consumer companies drive consumption to maintain their competitive advantages?

The first example here is on research and development and the importance of R&D to drive innovation and growth.

Colgate is a large multinational consumer staples company

that specializes in oral care and pet food.

Colgate's a great example of company that has continued to reinvest in its product, moving from pastes and gels that improve your brushing experience to focusing on widening and aesthetics that are important driver within the online world.

This has driven sustainable growth, maintaining its advantage as the largest oral care brand globally.

Colgate has accelerated its research and development over the past six years, driving increased growth.

This prioritization of R&D in a high-quality brand portfolio has accelerated revenues and generated returns of over 8% per annum for shareholders.

So that was the importance of research and development to drive growth and maintain the strength in brand.

Next is the importance of premiumization.

So premiumization enables a consumer to remain with a brand during market cycles.

Nestle is a great example of a company that drives a good, better, best strategy across its key categories of chocolate, coffee, pet food, and infant formula.

This is key to drive growth and to retain the customer regardless of consumer health.

On the slide is an example of premiumization in the coffee segment.

Nestle's investment into its coffee franchise

is offering products at the lowest cost instant coffee brands on the left hand side, all the way up to single origin coffee pods on the right hand side.

Over the last 15 years Nestle has delivered returns of over 8% per annum to shareholders.

And finally on the importance of marketing.

L'Oreal is a great example of a company that is leveraging the power of marketing spend to retain its relevance,

sense of newness and driving customer retention.

Even though L'Oreal is the largest beauty company in the world through its scale and marketing spend and its high quality management they continue to take share.

Over the last 15 years L'Oreal has delivered strong shareholder returns of around 10 per cent per annum to shareholders and with you given these competitive advantages and its prioritization of marketing it can continue to do that in the future.

Let's bring all of these learnings together now.

So we pose some questions to you at the beginning.

Firstly, don't forget your toothbrush when it comes to investing and growth where you least expect it.

Do you agree now that consumer staples and healthcare companies are adding value to your portfolio?

With consumer staples and healthcare as essential services, these companies provide defensive growth to your portfolio.

As you can see on the left-hand side chart there in a drawdown,

The market capture is less than 50% in staples and healthcare versus over 120% for your higher risk technology sector.

These sectors give you downside protection, but of course, we still want to be growing our investments over time.

Finally, I'd like to present Magellan's Global Funds.

It's a portfolio that is designed to deliver consistent returns of around 9% per annum through the cycle whilst also protecting capital.

It's a high quality portfolio of companies that are positioned to protect and grow wealth for decades to come.

The portfolio is leveraging the analysis that we discussed today.

First, we're investing in high quality companies.

These companies are both defensive growth but also structural growth.

The defensive growth companies are in the lower right hand corner of the slide with examples like Colgate, L'Oreal and Nestle that we've discussed today

These are quality resilient compounders that offer resilient demand through the cycle.

But we're also investing in quality structural growth companies, companies that we have a high degree of conviction in growing earnings for decades to come.

We're investing behind tailwinds like e-commerce, generative AI, streaming and software, compounding wealth with a high degree of confidence.

Thanks for joining in today.

Thanks, Elisa.

Now, how has the health care and consumer staples sectors performed in the recent drawdown?

Yes.

So throughout February and March, we have experienced a drawdown where the market has sold off over eight percent in Australian dollars.

And this was really driven by the geopolitical tensions in the US trade negotiations.

Over this period, staples and health care have

performed as we would be expecting from the discussion that we've had today.

They had positive returns of around 3% over that period, whereas your higher risk technology stocks have sold off around 13%.

So it's a really important reminder of the role defensives can play within your portfolio, generating those attractive risk adjusted returns.

Magellan is known for investing in quality, but also considering enduring themes.

Now, what themes are you monitoring within the consumer staples space?

Yeah, so with respect to enduring themes for consumer staples, or when we're thinking about enduring themes more broadly, we're thinking about them as a potential risk and a potential opportunity.

So within the staples space, health and wellness has been a trend that we've been monitoring for many years and more recently what's come into that trend is the impact from GLP-1s, those weight loss medications like Azempic because those medications can have an impact on consumption which can then have a long-term impact on the sector.

So what we're monitoring and how we're then looking at well which companies are better placed to

protect against this longer term risk is within the food companies we're focused on that R&D pipeline that we were talking about today.

So when you're on the GLP-1 medication you're still going to be consuming food you're just going to be having smaller portion sizes and perhaps lower calorie meals as well.

So we're looking at food companies and their ability to pivot to offering options to those individuals where it's smaller portions

healthier meals that will enable all consumers to be purchasing goods from these companies.

So staples companies that are innovative are attractive to us, but then also staples companies that aren't impacted by the GLP-1 trend, which is your household goods and beauty, which still remain incredibly attractive.

Thank you for your time, Elissa.

Thanks, Angelina.

Great to be here.