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Top of the stocks

06 August 2020

We take a look at some of the stocks that are at the top of fund managers' holdings and why they might prove to be successful long-term investments.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why fund managers are investing in certain companies.
  • Why looking at a funds asset holdings can give vital insight.
  • What stocks are proving to be popular.

Scanning a fund’s top 10 largest holdings can be quite telling... as can be the changes in allocation and ‘ranking’ within the list. You can take a look at a fund’s top 10 holdings on the ‘analyse’ tab of the product factsheet page online.

The size of a holding in a particular company is reflective of the conviction that the fund manager has of it. So, a high weighting relative to other shares in the fund will usually mean that the fund manager has a very positive outlook on the company’s future.

These top stocks represent the best ideas that have been whittled down from a choice of hundreds, if not thousands of companies. While the ‘top 10’ is an arbitrary number, these holdings can offer an interesting snapshot of the best thinking from some of the sharpest minds in the industry, and the top stock can act as a good representative of the type of companies that the fund manager looks for.

So, how does a fund manager go about selecting stocks?

In an efficient market, where share prices quickly adjust to new information, active managers seek to identify the companies that will rise in value faster than the wider market.

Therefore, in such an environment, fund managers and their teams of analysts are challenged to delve deep into these companies’ financial records, evaluate their market, their competition, their supply chain, client base, even the regulations they’re governed by in order to glean an insight that may not yet be apparent to the rest of the market.

As you’d expect, some managers are better at doing this consistently well than others. To put this into context, let’s look at a few of the Equity funds on the Barclays Funds List, which invest overseas, their largest stock positions, and some of the reasons perhaps why these companies sit atop the fund’s list of stocks.

First we have ASML

In 1965, Gordon Moore, one of the cofounders of Intel, predicted that the number of transistors on a semiconductor chip would double every two years. This became known as ‘Moore’s law’ and it has lived up to the prediction ever since. But as the years roll by, it gets harder and harder.

Back in 1984, you could fit 2,200 transistors on one square millimetre of a computer processor chip. By 2015, that number was almost 8.5 million. And while the semiconductor manufacturing companies around the world have managed to keep up with this incredible rate of change, they can only do it because of one company – ASML.

ASML is a Dutch company which manufactures the machines which enable the semiconductor companies to manufacture the chips. It is an incredibly complex procedure called photolithography, which involves printing the circuits onto a silicon wafer to create a semiconductor chip. The company’s dominant position in the market means it makes nearly 50% profit on every €1 of revenue, and is today the largest technology company in Europe (by market capitalisation).

ASML is one of the largest companies in the BlackRock European Dynamic Fund.

Next up we have Moutai

In 1972, Richard Nixon became the first US President to visit mainland China. To celebrate his visit, the Chinese Premier Zhou Enlai, held a state banquet and Moutai was the drink of choice. Since then, Moutai has been used on countless official occasions with foreign heads of state and distinguished guests visiting China.

Moutai is a brand of Baijiu – a Chinese alcoholic beverage. The drink itself is an acquired taste, made from distilled sorghum (a cereal grain, that resembles corn in the fields). Initially associated with Chinese state banquets, the drink is becoming more and more popular with the growing middle class across China. Very much like cognac, there is no ready substitute for Moutai, which means it can maintain its premium price and deliver premium profits. 

Chinese based Kweichow Moutai manufactures the premium brand in this market and as such demands premium prices. In fact, 60% of the sale price of a bottle of Moutai is profit. What makes this company especially interesting is that sales are very much focussed in China, so the company is little affected by the US:China trade dispute.

Kweichow Moutai is one of the largest companies in the Fidelity Asia Fund.

Finally there’s Shimano

If you are into cycling, you will know the name Shimano. The Japanese company manufactures components for bicycles, in particular the brakes and gears. In fact, approximately 70% of all new bikes sold contain Shimano components. So, it doesn’t matter who’s selling the most bikes, if you want to bet on an increase in sales, Shimano is an interesting way to do that.

One half of the story in bike sales is taking part in the UK today. There has been a surge in demand for new bikes, as stay-at-home workers look for new means of exercise and ways to spend time with their family. Demand has also been fuelled by workers looking for alternative means to commute to work than having to rely on public transport, and bikes are the perfect choice. So strong is the demand for bikes that shops can barely keep up with demand – a newspaper article recently reported on the boom in sales and the shops being stripped of bikes, by announcing “bikes are the new toilet paper”.

The second half of the story behind Shimano is electric bikes. When you look at the sales of electric transport, the headline grabbing media story is what’s going on in electric cars. However, the most popular form of electric transport is bicycles, by a significant margin, where a recent report from Deloitte predicts the number of e-bikes on the roads will easily outpace other e-vehicles by the end of this year1. And it does not matter which company is selling the most electric bikes, because the majority of them have Shimano components fitted.

Shimano is one of the largest holdings in the Janus Henderson Global Sustainable Equity Fund.

While these companies provide interesting food for investment thought, they are just a few examples of the kind of stocks that active management can allocate to in order to try to deliver above market returns. Our references to these shares are not recommendations to buy them. We don’t offer personal investment advice. If you’re unsure seek independent advice.

Here at Barclays we aim to identify the best managers that are able to consistently identify such opportunities over the long term, and compile them in a balanced and diversified portfolio accessible to retail investors. You should nevertheless appreciate that it is not possible to be certain which managers or companies will perform the best in future and all investments can fall in value as well as rise; you may get back less than you invest.

[Note: all stock positions and data are at time of writing (07/20) and maybe subject to change]

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