What is your definition of a leisure company? Everybody understands that Disney or Nintendo are companies belonging to this sector but what about Heineken or Adidas?
The GT Leisure fund is a sector fund but it is a sector fund with a broad spectrum of qualifying industries. I describe leisure activities as those things people do because they want to, not because they have to. It’s the goods and services we spend our money on once we’ve taken care of the essentials.
This interpretation of leisure leads us to investment in, for example, cable TV and satellite programming, hotels, casinos, advertising agencies, publishing, beverage, toy and video game companies. The fund is diversified across industrie
s as well as across companies with varying market capitalisations, with an emphasis on mid-cap stocks. The common thread among our holdings is the company focus on consumers, rather than on businesses.
It is thought that both economic and psychological factors significantly affect leisure companies. What is your opinion?
I believe that many parts of the leisure sector are less economically sensitive than you might think. For example, the toy company Mattel and several of the beer companies are among the largest holdings in the Invesco GT Leisure fund.
Sales of these products are not really affected by the economy. On the other hand, sales of luxury goods and many consumer durables such as cars, refrigerators, and high definition television sets are economically sensitive but we don’t have any companies in the businesses in the fund.
As I look at the leisure sector, despite the concerns about the economy and stockmarket, I am continuing to see some signs of an improvement in business conditions. Ad budgets are increasing in Europe and the US, movie attendance is up, and group business and vacation travel plans have not weakened despite the impact of the stockmarket on consumer wealth.
Toy, video game and beer sales are also doing well. So, we continue to see significant areas of strength in the sector. It’s also worth noting that we have taken advantage of this uncertain market and accompanying volatility to add to some of our favoured holdings as they have reached attractive levels.
Have you seen some fundamental changes in the leisure industry after September 11th?
There has been some impact. There is less business travel and while consumers are still taking their vacations, they are less willing to fly to get to a vacation site. Luxury good sales have been affected.
As noted above, we continue to see strength in group business and vacation travel, as well as many categories of consumer spending. We have not witnessed any significant fundamental or structural changes within the industry. We continue to identify and invest broadly in opportunities across the sector.
Also, we have not had cause to alter our investment strategy - when evaluating a potential investment, my concern is where the company will be in two to three years. I ask management “What is your three-year strategic plan?” and “What are your corresponding financial goals?” I then evaluate whether the company has the right management team and adequate resources to accomplish its vision.
Your fund is heavily invested in US companies. Are you considering increasing your position outside the US?
I am always looking for great investment opportunities on a global basis. Though many of our holdings are US-based, they in fact derive a large portion of their revenues from non-US operations.
In pursuit of new non-US opportunities, I visited numerous companies in several continental European countries in June, and I will be taking a research trip to the UK [over the summer]. What we care about is finding the best growth opportunities in the leisure field at reasonable valuations, regardless of where the companies are based.
Is investing in this sector quite different from investing in other sectors like technology or finance?
I would say that it is broader in that sense that the leisure sector includes a variety of investable sub-industries with differing fundamental drivers. Given this aspect, I believe my 20 years of leisure industry research and investment experience serve as a valuable asset in the management of the fund.
The fund has done extremely well compared to other leisure funds. What is your secret? In what aspects do you think your fund is different from the other leisure funds?
First, I would note our diligent fundamental investment process. We thoroughly research our current holdings and potential candidates to understand these companies’ strategic plans, financial health, and competitive markets. Our goal is to determine if a company’s business model is sound, does the company offer a unique product or service or one with a competitive advantage, and is the company moving in a direction that ought to improve its competitive position.
As part of this process, we maintain regular contact with company managements, buyers, customers and competitors. We are constantly in the field attending industry conferences, visiting stores and points of sale, and speaking with the end-customers to gauge consumer satisfaction and product sales potential.
Second, as mentioned above, we consistently evaluate our investments on a two to three year horizon basis and this approach provides us with longer-term confidence in our holdings. Consequently, you will notice a consistency in the fund’s top names – an aspect of our management style that results in a low turnover, 25-30% annually, relative to most equity funds. As well, reflecting our conviction in their potential, we invest a significant portion of the fund in our most favoured stocks.
Third, I always emphasise valuation in my stock picking process. The price/earnings ratio and price/cash flow ratios have always been below that of the broader market which has resulted in the fund having a lower beta than the market. We do not expect to change our low P/E strategy.
What are the minimum criteria for a company to be included in your portfolio?
In addition to some of the criteria noted in the last question we look for a strong, adaptive management team. The market for leisure products and services is very dynamic – the leisure team needs to feel confident in a management’s ability to adapt to a changing environment and still meet revenue and earnings targets.
We also like to invest with a management team that fosters innovation across a company, from top to bottom, from product development to operations. Innovative companies take calculated risks and are willing to introduce fundamental changes into their business model. When well executed, these types of changes can help leading companies garner market share and greatly enhance shareholder value.
We also monitor valuations to ensure that we are comfortable with the risk/reward profile of our investments.
Are you looking for attractive valuations or good growth prospects?
We look for companies that can grow earnings and cash flow at 10% or better rate compared to the 7% average growth rate of the S&P 500 and MSCI EAFE earnings. We prefer companies with below market valuations. Sometimes we have to exercise patience while the fund’s investments reach their potential but we believe our record on the fund serves as evidence that this strategy is paying off.
