James Kinghorn, Nikko Asset Management

As Investment Director, Global Equities, for Nikko Asset Management, James Kinghorn has his finger on the pulse of global trends and opportunities. We recently caught up with him and spoke about the areas of strong interest to Nikko right now, as well as his macroeconomic views.

Kinghorn believes synchronised global growth should offset negative sentiment, however inflation and geopolitical concerns will fuel market volatility.

Among his key investment areas of interest right now are healthcare, US banks and gaming companies.

Listen to our podcast, or read the full interview below.

Transcript

Tony Kaye: I'm talking with James Kinghorn, investment manager at Nikko Asset Management, based in Edinburgh. Welcome James.

James Kinghorn: Hi Tony. How are you?

Tony Kaye: Yeah, very good. James, what brings you to Australia?

James Kinghorn: Well I'm over for a week, week and a half. I'm meeting a client, potential clients with our investment team here.

Tony Kaye: Okay, and let's just talk about your area of focus in Nikko.

James Kinghorn: Yeah, so we manage Nikko's global equity products. And so we've invested in high conviction global equity emerging and developed markets.

Tony Kaye: And in Australia, are you looking at particular companies here, which you might be investing in or are you mainly talking to potential investors?

James Kinghorn: This particular trip, just talking to investors, but you know we do travel broadly around the world to try and identify companies that we think might be attractive for our portfolios.

Tony Kaye: What are you looking at, at the moment in terms of investment markets. Are you looking to make changes in your portfolio at this particular point in time?

James Kinghorn: No. We're very comfortable with our portfolio, like I said, we're high conviction. We only hold about 40 stocks in our portfolios. We don't turn over our portfolios, we're long-term investors, so we don't change our portfolio too much unless we find particularly interesting ideas.

And it's all based on our philosophy in terms of trying to find companies that can improve returns over the long time because ultimately we believe stocks that can generate improving and high sustainable cash return investments ultimately outperform the markets.

Tony Kaye: We've had some interesting stuff going on in the markets of late, as you would know, with quite a bit more volatility. Has that forced you to review any of the companies in your portfolio or as you said, is it still a matter of just sticking to the long-term strategy?

James Kinghorn: For us it's always about sticking to the long-term strategy, sticking to our philosophy. These periodic bouts of volatility are not unexpected, we've had a very, very long period of low volatility.

I think that's being driven, personally, I think that's being driven by liquidity from central banks, which it looks like its reversing globally. And so we should expect a period of high volatility going forward. I think, on the positive side, we are getting a lot of good growth in the economy, global growth. It's very synchronized, so that should offset, certainly, some of the negative sentiment in that light.

Tony Kaye: Yeah, of course this volatility came into effect largely as a result of geopolitical concerns. And there's still a lot of geopolitical concerns out there. So I suppose you could say that this is back to reality. The new normal, perhaps.

James Kinghorn: I think that's right, there is going to be plenty of geopolitical concerns. I think some of the volatility was also around rising inflation expectations, so as I said, there is synchronised growth but with synchronised growth comes heightened inflation expectations. Job growth in America is very, very strong. We haven't seen that come through in wage growth particularly yet, but the participation rates in the US economy is increasing. And, ultimately, that potentially could lead to higher inflation and I think that's what people are scared of at the moment. That's what people have been scared about.

I don't think we're at that point, I think, inflation is at about 2 per cent, which is probably about right considering where the job market is. But as growth continues, and we've got more growth coming through in the US, there's been very positive, about 3 per cent, but with tax cuts, etcetera, we're going to get a further boost from that. So I think people are going to start questioning whether inflation is going to increase significantly from here so together with a bit of geopolitical risk, yeah, ‘the new normal' is probably a good way of putting it.

Tony Kaye: Let's have a bit of a drill down into your portfolio. Some of the companies that you have in your portfolio. What are they? What types of companies are they?

James Kinghorn: Yes, so at the moment, we've got a significant weight in health care sector. What we focus on in health care, the types of companies that we focus on in health care is companies that help reduce costs. So, obviously health care inflation around the world is very high. The cost of health care is a real burden for economies and individuals. And health care inflation has been very high so there's a big push to try and control that somehow, and obviously age becomes more of an issue so, we try and focus on companies that can help manage that cost, and eventually reduce that cost. We've got some CRO companies (contract research organisations) in the portfolio, we've got a couple of companies focused on long-term trends like sleep apnoea as well. So we have a couple of things in our portfolio with very sustainable growth but also helping to reduce costs for the sector.

Tony Kaye: So these are companies that are service providers into aged care?

James Kinghorn: So these CROs are contract research organisations, so they do a lot of their research for big pharma companies, big bio-tech companies, and it helps take costs out for the major pharma companies or reduce costs because they outsource their manufacturing.

Tony Kaye: Okay, and what other areas of interest in the portfolio?

James Kinghorn: So, we've been overweight US banks as well, and we've been overweight US banks for a significant amount of time, largely because we've been very positive on the growth in the US economy.

But also the US banks were very quick to clean up their balance sheets, post the great financial crisis and are very deposit rich, so if we do get increasing interest rates, which in the US I think, particularly next week, are almost certain to. But there's probably two, three, or more down the line, so they're going to get a bit more pricing power, and they won't necessarily have to reprice their deposit base as well. So we'll get a nice spread there.

Tony Kaye: Definitely an area which has come from quite a low point up to where they are now. There's been quite a strong recovery there. And what about other areas or regions that you're looking at?

James Kinghorn: So I guess another area we've got quite a lot of tech companies. We're very positive in the gaming industry so we've got, what, three gaming companies in the portfolio. Three of the four largest gaming companies in the world. We call it a niche industry but it's actually about a 120, 130 billion dollar industry today, growing at 8-10 per cent. Gaming is a far more stable industry, we believe, than it has been in the past. Wider demographics, wider demographics but also more subscription based so in the past a gaming company would develop a game, go out, market it heavily, at a great cost. It was either a hit, or it wasn't. They generate cash flow in the back of that, and that would be good until someone else created the next new hit. The subscription based model is more about, users subscribing to gaming communities, and playing games together with other friends, family or other gamers.

That's providing far more stable revenues for the gaming industry so that's one we really like. Obviously Tencent's the largest gaming company in the world, and mobile gaming is the fastest growing segment of gaming as well.

Tony Kaye: So Tencent, but is that also taking in companies like you know Sony?

James Kinghorn: Sony as well. Sony's gaming segment is doing very well. Sony itself has improved dramatically, it's returned dramatically and it's central business is doing very, very well. Management has done a great job of reallocating capital to high return businesses within their company.

And then Microsoft, is obviously a very large gaming company as well. So those are three companies we hold there.

Tony Kaye: So would it be fair to say that you identify industries or sectors where you see strong growth and then delve down into those areas to find companies which fit into that growth strategy?

James Kinghorn: Yeah, most of our processes are all very bottom up, so we're looking for companies that either are within an industry where there's some sort of secular change, so profitability will improve. We're looking for companies that are innovative, so new products work and generate growth and higher returns over time.

And we're looking for companies where there's change of management, and we really believe that that management is going to make a structural difference to the business. So it's always about focusing on the companies that we think can improve returns of a business. And that has to come down to one of three things within it.

Tony Kaye: Do you ever look at the new rogue sectors, if I can describe them that way? So some people might call them disruptors. I don't personally like that term but a lot of people are using it.

James Kinghorn: Yeah, absolutely. We have several. Within our tech, I guess, one of our... we like the cloud business. Obviously the cloud business is very disruptive to traditional IT architecture so as companies, enterprises, shift resources away from internal IT architecture to the cloud, the cloud space is growing very quickly.

Big public cloud companies such as Amazon, Microsoft. But we've found that a lot of companies, a lot of enterprises are quite happy to shift their resources there. But it comes as, they don't want to be locked in by these big cloud providers, they prefer to have the multi-cloud architecture.

So they want some in the public cloud because it's cheaper, they're obviously going to have some IT architecture in house, and perhaps some private cloud because some of the data is very sensitive and they want to maintain control of that. But having multi-cloud, or hybrid-cloud strategy is quite complex and it requires new software, new tools to be able to manage that architecture.

So we've got Red Hat, which is an open source software company that plays into that, that theme. We've got a big position in that as well.

Tony Kaye: Alright James, well thanks very much for coming in today.

James Kinghorn: Not at all.

Tony Kaye: It's been a pleasure to have you.

James Kinghorn: Yeah, thanks very much for having me.