Strategies

Global Franchise Strategy

Strategy Inception

March 1996

Asset Class

Global Equity

Quick Facts

Benchmark

MSCI World Net Index

Top

Overview

Overview
Investment Approach
Investment Process
Portfolio Managers
Insights

Overview

The Morgan Stanley Global Franchise Strategy invests bottom up in high-quality, well-managed companies at a reasonable price. Characterised by their powerful intangible assets, notably brands and networks, these companies have high and stable returns on operating capital which the team believes can be sustained for the long term. The strategy seeks to generate attractive long-term performance with reduced downside participation in challenging markets.

Differentiators

Defensive characteristics

The team’s research shows investments in high-quality companies, which exhibit characteristics such as strong franchise durability, high and recurring cash flow generation, low capital intensity and minimal financial leverage that have generated competitive returns across market cycles.

Managing the risks that matter

The team’s criteria and disciplined investment process create a concentrated portfolio that is highly differentiated from the benchmark. The team attempts to minimize loss of capital, rather than tracking error, by focusing on franchise resiliency, management quality, financial strength and valuation.

Differentiated returns

The team’s goal is to compound shareholder wealth at a strong rate over the long term; therefore, capital preservation is key. Because of the specific investment criteria and the disciplined manner in which it is applied, the Global Franchise Strategy has the potential to offer: attractive long-term return potential with lower absolute volatility than traditional benchmarks; a strong bias towards capital preservation; and low annual turnover due to a long-term investment horizon.

Investment Approach

The team believes that a portfolio of high-quality companies, whose primary competitive advantage is supported by dominant, hard-to-replicate intangible assets, has the potential to generate stable, consistent returns and help preserve capital. In the team’s view, this involves investing in companies that can potentially compound shareholder wealth at a superior rate over the long term, while offering relative downside protection. The team’s research shows that these high-quality franchise companies, or “compounders,” which exhibit characteristics such as strong franchise durability, high and recurring cash flow generation, pricing power, low capital intensity and minimal financial leverage, have generated strong returns in both inflationary and deflationary environments.

Investment Process

Identify High Return Companies

High and unlevered ROOCE
High gross margins (pricing power)
Capital-light business models driving FCF generation
Strong balance sheet

Make Sure Returns are Sustainable

Ability to remain relevant through powerful intangible assets such as brands, sustaining high barriers to entry
Returns sustainable against material threats, including Environmental or Social factors
Dominant market shares protecting against new entrants
Stable sales – often repeat business driving recurring revenues
Steady organic growth and geographic spread

Confirm management's commitment to sustaining returns

Focus on return on capital rather than sales or EPS growth
Capital discipline
Commitment to innovation and investment in franchises
Review management incentives
Sound Governance structure
Engagement on material issues or opportunities where relevant, including ESG factors

Valuation

A focus on free cash flow, not accounting numbers
FCF yield, DCF, EV/NOPAT

_{(EV = Enterprise Value (Market Value plus Net debt. NOPAT = Net operating profit after tax)}

Portfolio Managers

Team Insights

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Return On Operating Capital Employed (ROOCE) is a ratio indicating the efficiency and profitability of a company’s trade working capital. Calculated as: earnings before interest and taxes/property, plant and equipment plus trade working capital (ex-financials and excluding goodwill).

Free cash flow (FCF) is operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends.

OTHER CONSIDERATIONS
The MSCI World (Net) Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions. Investment team members may change from time to time without notice.