Vantage interview: navigating global market uncertainty, an interview with Zehrid Osmani

Interviewer: Neil Shah
Welcome back to Vantage. First quarter we've seen a reversal in last year's trend as people look to diversify out of US exceptionalism. We thought it'd be a great time to go and take a look at a global portfolio manager, what his ideas are. They've got a great website, key themes, lots of stock ideas there. Let's go take a look.

Welcome back to Vantage. We're taking a look at a global portfolio manager today, looking at some pickup stocks around the world. Delighted to be joined by Zehrid Osmani. Welcome to Vantage. So tell us a little bit about yourself and the fund that you manage.

Zehrid Osmani
Yeah, sure. So I manage the Franklin Global Trust, which is a trust that invests on a global basis. We are very much focused on the best ideas, very concentrated, so typically a 30 stock or so portfolio - and we really try to capture the best ideas across the globe. We look at opportunities on a 5-to-10-year time horizon. And we want to capture companies that have structural growth opportunities, but also that are really well positioned within their industry in terms of having a dominant market position, a higher return on invested capital, strong balance sheets, good management, and very importantly attractive valuations.

Neil
There's been a little bit of transition, so … there's a move from Martin Currie Global Unconstrained and the team moved to Franklin Equity Group. What does this mean for investors in terms of additional resource? And has there been any changes in the way the portfolios managed, the risk management? Anything that you want to sort of telegraph on that?

Zehrid
Well, the first thing to say is that there's no change to the investment approach or the investment philosophy, and that's important. Equally, no change to the investment decision making process. Then in terms of what it means for us, we're very excited about being part of the Franklin Equity Group because it's a well-established global franchise focused on growth based in Silicon Valley at the heart of where innovation is coming from.

So, our focus on finding companies with structural growth opportunities that are innovative, that have a low risk of disruption, is actually going to be enhanced by over 60 investment professionals, full coverage of the US equity market (which is 2/3rds of the global index) so that's going to help us. And a central research group that has over 30 analysts with very good depth and breadth of knowledge in the sectors of the cover, very long tenure in covering those sectors. So again, it will help us in terms of generating ideas, in terms of exchanging viewpoints and, ultimately, in terms of being able to capture the best opportunities globally for our shareholders.

Neil
I think we all aged in the first quarter of this year. It's been a pretty volatile time. You're very much a bottom-up in investor, I understand. But what's your perspective on this sort of macro, macroeconomic backdrop, especially given the volatility that you've seen in the market and this sort of rapid news cycle that you see?

Zehrid
Yeah. It's been phenomenal for everyone. And I'm sure you've also had other managers that have commented in the same way Neil. So, when we wrote the outlook for ‘25 at the end of last year, we highlighted that every part of that outlook could potentially be influenced in a material way by the Trump administration. And they have. Whether it's in terms of the macroeconomic momentum, whether it's in terms of the inflation outlook, whether it's in terms of monetary policy shift and in terms of corporate earnings outlook. So, all of which we've had to actually update in the last month. And the way we're looking at it now is that increased uncertainty related to tariffs that have been more broad-based and more significant than anyone expected is bringing a rapid decline to the soft data, both in terms of consumer confidence and business confidence. And that should impact the hard data in the weeks and months to come. So, we expect a potential negative momentum in terms of economic activity across the globe, not just the US, and that will also lead to potential downside risk to the corporate earnings outlook. So, the way we look at it is we're not quite heading into a recession, but it's gonna feel very recessionary by the sharp slowdown that we might see both in the US, in Europe and in Asia/China. And in terms of corporate earnings, they have been coming down in the run up to these announcements where we think that's going to accelerate. We're in the midst of the Q1 reporting season and we're already seeing some profit warnings across Consumer, across Industrials, across some area of Technology. And we believe that that could accelerate. And it's really about the climate of uncertainty that's leading corporates to hold back from making big capital investment decisions and consumers to retrench in the in the light of an uncertain environment.

Neil
OK. It's a fairly cautious outlook, but with that in mind, I think it'd be really useful to understand the investment process that you sort of undertake. And I love bringing these things a little bit to life for people by actually, you know, looking at some portfolio stocks and actually how they fit that selection criteria. So, let's let's start with the investment process that you undertake and then maybe we can talk about a couple of stocks and how they fit that.

Zehrid
Yeah. Investment process is very, very much focused on finding companies with quality growth characteristics. And for us, quality growth characteristics means companies that generate high returns on invested capital and have solid balance sheets and an attractive growth profile. These are, in a nutshell, the three areas. But when we look at companies, we look across four fields. We look at industry risks, company risks, governance and sustainability risks and portfolio risks.

On the industry risk, we want to make sure that we capture companies that evolving industries that have favourable dynamics for value creation. So, these are industries with low risk of competition, low disruption risk, high barriers to entry, strong pricing power, weak supplier power and that have a good supply chain.

Generally. On the company risk, we look at various aspects. We look at regulatory risks, country risks, political risks, but we also look at balance sheet, we look at cost-based inflation, we look at areas that matter to the investment case of a company.

On the governance and sustainability side, we typically want companies that have good governance, so good quality of management, good breadth and depth, good alignment of remuneration with shareholders’ interests.

And on the portfolio risk side, we look at companies that enhance our overall risk profile. So that's in terms of diversification, it's in terms of enhancing the return on invested capital at the portfolio level. And really the essence of that framework is to make sure that we look at risks across all aspects of any investment case. And that gives us a good picture about the various areas of risks. And it's not about avoiding risk, it's about making sure that we know where the risks are so we can calculate them, so we can then conclude whether the current share price is discounting overly negative an outcome and that's when we can take the opportunity.

Finally, Neil, valuation discipline is important. For us, valuation discipline means a structured framework where we use three tools and there are long-term valuation tools, discounted cash flow and economic value-add, which permits us to put a fair value on the business rather than what the market might be willing to pay over the next 6 to to 12 months. That's it. And that permits us to then harness the opportunity when the market gets dislocated like is the case probably at the moment.

Finally, we bring it all into an approach of harnessing the best ideas, but which means highly concentrated 30 stock portfolios typically, but at the same time ensuring that we're diversified and that diversification is brought in through different lenses. We look at geographic exposures of the operations of the companies that we invest in, both in terms of revenues, profits and production base. We look at the exposure to their end markets because sometimes you could be investing in a company in the Technology space, but actually its end market, it's construction. So, you have to be aware of that.

And the final and actually very important area is thematic. We have a thematic framework to make sure that we capture long-term structural growth opportunities. And if I can maybe talk a bit about that thematic framework. We have 3 megatrends that we've identified, demographic changes, future of technology and resource scarcity. And Neil, if we sit here in 10 years or 20 years’ time, we're still going to talk about these three megatrends. There are themes in these megatrends that we identify and those can evolve over time. But what we're able to do is assess each company in terms of which theme it is exposed to and to what extent, which permits us to be much more detailed and accurate in terms of assessing exposure to any given themes.

And at the moment, there are three seismic thematic shifts that we're favouring. One is energy transition, two is ageing population, and three is AI, artificial intelligence. And on each of those there are sub themes - so if you look at artificial intelligence, there's four themes that we favour. Metaverse and quantum computing is one (nascent but fast growing); Robotics and automation, which AI will accelerate; Cloud infrastructure, which is something that hyperscalers are busy upgrading to harness AI and related to that, cybersecurity.

And then the fourth one in AI is technological and geopolitical fragmentation. What do we mean by that? It's about China versus US. It's about Taiwan as a geopolitical focal point for these countries. It's about the fact that there's restrictions to semiconductor access to China. And that means that we are living in an era of geopolitical and technological fragmentation. And we've seen that with the DeepSeek useful earlier this year and all the ramification that's happened.

Neil
And turning that into, you know, a couple of things that sort of sit in the portfolio…walk me through, you know, the elevator pitch of a couple, a few examples.

Zehrid
So, our focus is on finding companies that have leadership positions in the industries in which they operate, the potential to therefore be #1 or #2 - if they're not already #1 or #2 -that have exposure to structural growth opportunities with low disruption risk, high returns on invested capital, strong balance sheets, high returns on invested capital, strong governance of which quality management and attractive valuations….

So, when you then look at the portfolio, we're finding companies like Ferrari in the consumer space. It's a company that's got strong pricing power, a strong franchise, a long-term structural growth opportunity, resilience in periods of downturns and these are again the characteristics that we like.

If we then move to other areas, Consumer Staples: L'Oreal. Yes, it's a company that's had short-term headwinds not only from the Chinese consumer, but typically in periods of downturns tends to gain share, tends to consolidate it's market share and has high returns, good growth for a staple and that structural exposure to the theme of vanity, emerging market consumer, the emergence of the middle class in particular.

Then when we move to Technology, we like companies like NVIDIA and NVIDIA has been in the portfolio since 2021. We like this company because it's got a quasi-monopolistic position at the moment in the fast-computing power and it's at the heart of the AI theme. Given its scale, it's now achieved the technological superiority and technological leadership that we believe is anywhere between two-to-five years compared to its nearest competitor. And we think that that leadership position could continue to give them the ability to generate excess return on invested capital. So that's in Technology.

As an example, in the Industrial space, we like companies like Atlas Copco. Yes, it's an area of cyclicality, but a company like Atlas Coco has been able to more than cover its cost of capital through the worst of the economic crisis of ‘08 / ‘09. And that's what we like. Again, it's resilient business models even if they're not always totally immune.

Finally, in healthcare, we've got good exposure to various areas of healthcare, but a company we would highlight is Sartorius Steadium, which is benefiting from the drive for more productivity enhancing by the large cap pharma companies. So, it's exposed to the whole R&D development, the drug trials and the outsourcing related to that. And it's a company that should benefit from that ongoing drive for more R&D, especially as the world of healthcare turns towards more bespoke therapy.

Neil
Yeah, those are brilliant, brilliant examples. And let's stitch that back-up together. So, you know, when you pull over that together towards a sort of 30 stock portfolio what's the … I think you you, you've described the nature of the portfolio which is high quality companies, resilient etcetera over time. How do you differentiate that from your peers within the AIC global sector?

Zehrid
We think that the way we differentiate it is we're more concentrated 30 stocks, which means we really focus on the very best ideas. This is a high conviction approach.

Secondly, there are high return businesses, solid balance sheets and attractive growth profile. So that gives you some element of resilience. The fact that they're already generating strong profits and cash flows, the fact that they have strong balance sheets related to that strong pricing power, which we think is important in this environment of uncertain, uncertain outlook on inflation and tariffs bringing some pricing pressure.

And then they also capture those long-term structural growth opportunities that we talk about. And for us, the important series of time horizon, 5-to-10 years time horizon, which means that we capture two economic cycles, theoretically an economic cycle lasting five years, which means we can look through the short-term fears of recession and really capture businesses that we believe will really stand out over that.

Neil
OK. And if for people taking a look at the trust and with the usual caveat that this is no sort of indication of future performance, of course … could you talk us through the track record, the performance record. And also, you know, in you running the portfolio when does it tend to do well, and then when are things more challenging for you?

Zehrid
Yeah. We've had a couple of challenging years, notably during the period of ‘21/’22 when the market shifted in terms of style leadership away from quality and growth towards value. We don't invest in the value part of the market. So these are environments that end up being headwinds for our performance. And then last year, 2024 has been a headwind for us because of the market concentration. A lot of the market concentration has been about the Magnificent 7 and that's been led by the US equity market therefore, but very much those names and because we're concentrated, we really just pick the very best ideas. We haven't had all of those Magnificent 7 and that has been a headwind.

So, environments that work for us are environments where the market leadership is broader as a first point. Secondly, where there is a more certain outlook in terms of inflation and interest rate policies because ultimately as quality growth investors, the holdings we have tend to be sensitive to interest rate outlook. And if that interest rate outlook is volatile, it can create quite a bit of volatility in the portfolio as we've had.

But typically, we would say that if you've got a stable environment both in terms of inflation outlook and therefore monetary policy outlook and the market goes back to focus on fundamentals, we think that the companies we hold have very strong fundamentals, then those can surface in the eyes of the market and that valuation support that we know our stocks have then tend to come to the surface.

Neil
OK. Is there anything else that we should focus on, dividends, etc? If someone is coming to look at the trust for the first time, what would you sort of focus them on?

Zehrid
Yeah. So the trust has got dividends that are paid quarterly. It's also got a ‘zero discount’ policy, which means that our shareholders don't have to take the NAV discount that some trusts have.

And then we would point our prospective investors to our website where there's an extensive library of stocks that we like. We call it the library of stock ideas. And these are a good area of information. And at the same time, we've actually got various information about our process and the focus on the thematic investing and the three megatrends that we favour.

Neil
That is brilliant. So a lot of people watch this for education. Go and have a look at the website everyone, if you want to learn a little bit more. I feel like I've had a fantastic tour of the world with you. Thank you very much for being on Vantage with me.

Zehrid
Thanks, Neil.