Welcome to Morningstar's "3 Stock Picks". I'm Holly Black, with me is Alexander Chartres, he's
manager of the Ruffer Total Return Fund. Hello. Hi, Holly, how are you?
So, you've got three stocks for us today. Where would you like to start?
Well, let's start with Fujitsu. It's a big Japanese IT services business,
and Japan has, despite being one of the world's most significant economies, a very under digitised
economic structure. And Fujitsu's IT services business is very well positioned to play the IT
CapEx cycle in the Japanese corporate sector. But of course, excitingly we just had a change
of Prime Minister in Japan to Mr. Suga from Mr. Abe. And one of Suga's priorities is digitization
of Japanese government administration, for example. So not only have you got
Japanese corporates investing heavily in the IT theme, you've now got the Japanese government.
Suga's even setting up a specialist digitization agency. So the tailwinds for Fujitsu are very
considerable in that core business. So, I tend to think of Japan as being
quite an advanced economy. Why has the digitisation taken so long to catch on?
Well, it's a very very good question, and so I saw an extraordinary estimate from a Japanese
think tank that suggested that only about 10% or a little over, of Japanese administration
was conducted online, which is an extraordinary number. I think a big part of it is cultural,
but the key thing from our point of view is that the opportunity going from that low base
is absolutely enormous, so we play that in the fund through Fujitsu and also through another
company called NEC, and both look extremely attractive from a compound
earnings growth perspective going forward. Okay, let's get onto stock number two.
Well, stock number two Holly is a company called Aena. This is a Spanish airport owner and
operator. So, we think it's a really interesting element to have in the portfolio for that sharper
recovery scenario. And it's also worth noting that unlike a lot of other infrastructure assets,
Aena has a very diversified range of carriers flying into it. So not only does it have airports
all over Spain, rather than just one asset that you are overly dependent on its serviced by the
likes of Ryanair or Vueling or EasyJet. These are regional carriers that we think are more
likely to recover faster than the long haulers. And in addition to Aena's core business which is
regulated tariffs on airlines and passengers, they've also got other elements in the portfolio
that don't have a regulated return. So, for example, they're developing lots of sites
next to their airports around infrastructure and logistics, really around the Amazonification of
global commerce. So, that's an interesting asset that doesn't get much credence in the market,
but we think could be valuable as well. Okay, let's go on to stock number three.
Well, stock number three is a company called Charles Schwab.
Charles Schwab is really a big American bank and asset manager. It's one of America's
biggest banks, but it doesn't have credit risk. Unlike some of the other huge household names.
And if you get a rise in interest rates, you get phenomenal additional earnings power. In addition,
it's a big asset manager and they are completing a takeover of TD Ameritrade, which is offering them
some phenomenal synergies as well, and that will be very good for the earnings per share over the
next few years. So, it's really a 3 headed beast, and we think, given where rates are at the moment
it's a really interesting long-term quality compounder that also gives you exposure to
a material increase in interest rates. So, a lot of the UK banks and financial
stocks have been massively out of favor for this year, and even
before and have had to cut their dividends, are those trends affecting this company.
Well like all banks clearly anything that's dependent on interest rates
has had a difficult time. UK banks are an important part of our portfolio, but they're
held as an offset to our inflation protected bonds. So there's a very clear macro trade there,
but Schwab has these particularly attractive synergies from the merger and the large asset
management division as well, and they're also over time going to reduce their volatility to
interest rates, but for the time being, they remain that very powerful coiled spring.
Alex, thank you so much for your time. For Morningstar, I'm Holly Black.