The Morgan Stanley Global Franchise Fund follows a concentrated equity strategy that invests in high-quality franchise businesses, characterized by dominant intangible assets, high returns on invested capital, and strong free cash flow.
For the fourth quarter, the fund returned 1.13%, slightly outperforming the MSCI World Index. The fund attributed this to the fact the portfolio contained no energy stocks.
In reviewing the market during 2014, the fund’s commentary noted that the U.S. was least distracted in terms of volatility, with the MSCI US Index up 12.7% for the year. But the strong U.S. dollar transformed local market returns into negative U.S. dollar returns, and there were other events that contributed to volatility.
“Questions about the Federal Reserve ending its asset purchases, growth in China and Europe, politics in the Ukraine, the Ebola epidemic, and more recently oil, all added to volatility,” the fund commented.
The following six stocks were new additions to the Global Franchise portfolio during the quarter.
Twenty-First Century Fox (FOX, Financial)
The fund purchased 355,640 shares for an average price of $34.11 during the quarter. The new holding has a 2.3% portfolio weight.
Twenty-First Century Fox is incorporated in Australia and is a diversified media and entertainment company. The stock has been up 3% over the past year and is undervalued when compared with the Peter Lynch earnings line.
The dividend yield is 0.82%, which is close to the 2-year high, while the payout ratio is 6%.
FOX currently trades at $33.28 with a P/E ratio of 8 and P/S ratio of 2.3.
The fund purchased 100,764 shares of Walt Disney, which traded at an average price of $90.16 during the quarter. The stock has a 1.6% portfolio weighting.
GuruFocus rates Disney’s business predictability as a perfect 5 stars. The DCF model, which relies on earnings consistency, estimates a fair value $79.51. The stock currently trades at $103.51, giving a -30% margin of safety.
EBIT per share in FY 2014 was $6.48, which has increased consistently over time.
The current P/E ratio is 23.5 and the P/S ratio is 3.68.
Reed Elsevier PLC (LSE:REL, Financial)
The fund also purchased 184,385 shares of Reed Elsevier on the London Stock Exchange for an average price of ÂŁ10.38 per share.
The company provides professional information solutions to the science, medical, risk, legal, and business sectors. The EBIT per share growth rate has increased about 22% over the past five years.
According to the Peter Lynch chart, the stock may be overvalued.
The stock currently trades at ÂŁ11.32 with a P/E ratio of 23.6.
Reed Elsevier NV (XAMS:REN, Financial)
The fund also bought 130,711 of Reed Elsevier’s Netherland shares for an average of €18.56 per share. The stock has a 0.54% portfolio weight.
The stock currently trades at €22.75 with a P/E ratio of 25.4.
Hermes International (XPAR:RMS, Financial)
The fund purchased 3,774 shares of Hermes International, which traded for an average of €261.17 during the quarter. The stock has a 0.23% portfolio weight.
Hermes produces luxury accessories and apparel. The stock price has increased 25% over the past year and may be overvalued according to the Peter Lynch chart.
EBIT per share in FY 2013 was €11.62, a figure that has increased about 28% over the past five years. The following chart shows the company’s earnings trend over time.
The stock currently trades at €295.10 with a P/E ratio of 39.4 and P/S ratio of 7.94.
Indivior (LSE:INDV, Financial)
The fund purchased 476,994 shares of Indivior, which traded for an average price of ÂŁ1.42 during the quarter.
Indivor is a pharmaceutical company that develops drugs to treat opioid dependence. Of its three drugs, one is approved for sale in the U.S. The stock has increased 45% over the past year and currently trades at ÂŁ1.74.
Adjusted net income for FY 2014 was $420 million, down from $489 million in 2013.
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