What should a manager of funds that invest around the world do during a lingering disagreement between the U.S. and China? For Brian Beitner, managing partner of Chautauqua Capital Management, the answer is to avoid making investments that assume a favorable outcome for trade negotiations.
During an interview, Beitner named three companies he believes have business models that give them the advantages they need to thrive during a long period of trade tensions or even a recession. He isn’t counting on successful trade negotiations, and in his second-quarter market performance review called the combination of high debt levels and very low interest rates in the developed world “worrisome.”
Chautauqua Capital Management is a subsidiary of Baird Funds, based in Boulder, Colo., with about $600 million in assets under management in mutual funds and private accounts.
The Chautauqua International Growth Fund CCWSX, +0.08% CCWIX, +0.00% has $155 million in assets and a three-star rating (out of five) from Morningstar. The Chautauqua Global Growth Fund CCGSX, -0.22% CCGIX, -0.22% has $50 million in total assets and a four-star rating from Morningstar. Beitner oversees both funds, which each hold only a few dozen stocks.
The two portfolios are managed the same way, except that the Global Growth Fund includes U.S. stocks, which made up 41% of the portfolio as of March 31. This explains its better performance. Total returns and expense figures for both funds are below.
Three examples of companies with business-model advantages
Beitner said he and his team screen stocks using a wide range of criteria, which helps them overcome “time-tested bias” and helps identify industries they may have overlooked. He said a typical sweet spot for new investment is “companies at the lower end of large-cap,” that have moved through the “higher-risk small-cap phase, are large enough to defend themselves and are increasing their market share from 10% to 15% [annually] to eventually dominate their industry with maybe a 50% market share.”
That said, Beitner is certainly willing to hold a successful company for a very long time, and even after it has grown way beyond the “lower-end of large-cap.”
The Chautauqua International Growth Fund typically holds about 30 stocks, while the global fund (which includes U.S. stocks) holds about 40. But the funds are even more concentrated than those numbers indicate, as the 10 largest holdings typically make up 45% to 50% of the portfolios, Beitner said.
Beitner discussed three companies held by both funds. Here they are, with total returns and sales-growth figures:
| Company | Ticker | HQ Country | Industry | Total return - 2019 through July 12 | Total Return - 3 Years | Annual sales growth |
| ASML Holding NV ADR | ASML, -1.34% | Netherlands | Electronic Production Equipment | 35% | 112% | 28% |
| Temenos AG | TEMN, -0.03% | Switzerland | Information Technology Services | 48% | 244% | 14% |
| BYD Co. Ltd. Class H | 1211, +0.31% | China | Motor Vehicles | -4% | 2% | 26% |
| Source: FactSet | ||||||
The sales figures are for the most recently reported fiscal years.
You can click the tickers for more about each company. The tickers in the table are those held by the Chautauqua International Growth Fund and the Chautauqua Global Growth Fund. For ASML, the funds hold the American depositary receipts. The funds hold the locally listed shares for the other two. The ADR for Temenos is TMSNY, -1.78% and the ADR ticker for BYD Co. is ASML, -1.34%
Here’s a summary of opinion for these three stocks among sell-side analysts polled by FactSet:
| Company | Ticker | share 'buy' ratings | Share neutral ratings | Share 'sell' ratings | Forward price/ earnings ratio |
| ASML Holding NV ADR | ASML, -1.34% | 69% | 25% | 6% | 25.9 |
| Temenos AG | TEMN, -0.03% | 33% | 27% | 40% | 51.3 |
| BYD Co. Ltd. Class H | 1211, +0.31% | 50% | 12% | 38% | 33.3 |
| Source: FactSet | |||||
The forward price-to-earnings ratios are based on closing prices on July 12 and consensus earnings estimates for the next 12 reported months.
ASML
ASML Holding NV ASML, -1.34% is a Dutch semiconductor manufacturer with a stock-market value of $78.6 billion. Beitner first bought shares of the company 13 years ago, and has scaled in and out at various times, depending on its valuation. The company manufactures equipment used by its customers, including Taiwan Semiconductor TSM, +1.48% Samsung 005930, +1.52% Intel INTC, +0.66% and other companies to make computer chips. It has a tremendous advantage in photolithography, through which its equipment can make circuit patterns as small as seven nanometers in size. (A nanometer is a billionth of a meter.)
Beitner called ASML “a poster child” for his management style, which is to concentrate portfolios of “great wealth-generating companies that through business-model advantages dominate industries that are growing rapidly.”
“If you have a company like ASML that is mission critical to its customers, be they Taiwanese, American or Chinese, no matter the trade tensions, they are going to get orders,” he said, adding that “the mission-critical nature of the business enables them to overcome any geopolitical machinations.”
George Maris of Janus Henderson also likes ASML as a long-term investment, and in April discussed investors’ tendency to toss the stock overboard during frequent short periods when semiconductor stocks are out of favor.
The stock is part of the Euro Stoxx 50 and the broader Stoxx Europe 600 indexes.
Read: ASML Holding second-quarter net profit falls 18%
Temenos
Swiss-based Temenos TMSNY, -1.78% TEMN, -0.03% provides core systems to banks. If you think the industry’s consolidation makes this a difficult area for growth, think again: There are thousands of little banks and credit unions in the Europe, where the company does most of its business. And the nature of so much of the work in the industry, from data entry to regulatory compliance means there is tremendous room for innovation.
The annual sales growth on the table above is very impressive, especially in the financial services space. Beitner said that about 70% of Temenos’s new sales come from existing customers adding additional products or modules. “They are gaining traction in the U.S. and Asia,” he said.
One reason banks have been slow to innovate — sticking with tried and true mainframe systems and overnight processing for decades — is that it can easily take two years for even a small bank to move to a more modern core system. Beitner expects Temenos to continue to enjoy strong growth in its cloud-based real-time processing and customer-interface systems “as potential customers realize they are at a competitive disadvantage not to deploy their software.”
He called Temenos an example of a company that most investors haven’t yet heard of but is very well-positioned. With a market capitalization of $12.6 billion, it is part of the Swiss midcap index.
BYD Co.
BYD 1211, +0.31% stands for “Build Your Dream.” The Chinese electric car manufacturer also makes electric buses and batteries. Beitner said he has held the stock “off and on.”
Right now, he said he sees an excellent long-term opportunity for BYD, even though overall car sales in China have been “abysmal and getting worse” for a year and a half. Not only have electric-vehicle sales in China have been increasing but outside the big cities, China’s road system “is better than the one in the U.S., in many places,” he said.
“China has spent so much on infrastructure, it is truly world-class,” he said.
He also cited the influence of the Chinese government, which through its “Made in China 2025” plan seeks to become “the world dominator” in electric vehicles.
The Chautauqua funds are sitting alongside a well-known investor: Warren Buffett’s Berkshire Hathaway BRK.A, -0.89% BRK.B, -0.97% owns 24.59%, according to FactSet.
Fund holdings
Here are the 10 largest holdings of the Chautauqua International Growth Fund as of March 31:
| Company | Ticker | HQ Country | Industry | % of fund |
| Temenos AG | TEMN, -0.03% | Switzerland | Information Technology Services | 6.2% |
| Keyence Corp. | 6861, +2.28% | Japan | Electronic Equipment/Instruments | 5.4% |
| Novo Nordisk A/S ADR Class B | NVO, -0.60% | Denmark | Pharmaceuticals: Major | 5.1% |
| Naspers Limited Class N | NPN, +0.78% | South Africa | Specialty Telecommunications | 4.9% |
| TAL Education Group ADR Class A | TAL, -0.66% | China | Other Consumer Services | 4.9% |
| Genmab A/S | GEN, -0.61% | Denmark | Medical Specialties | 4.8% |
| DBS Group Holdings Ltd. | D05, +1.18% | Singapore | Regional Banks | 4.8% |
| Toronto-Dominion Bank | TD, -0.51% | Canada | Major Banks | 4.6% |
| HDFC Bank Ltd. ADR | HDB, -2.93% | India | Regional Banks | 4.5% |
| Sources: Morningstar, FactSet | ||||
And here are the 10 largest holdings of the Chautauqua Global Growth Fund as of March 31:
| Company | Ticker | HQ Country | Industry | % of fund |
| Temenos AG | TEMN, -0.03% | Switzerland | Information Technology Services | 5.5% |
| Nvidia Corp. | NVDA, -1.02% | U.S. | Semiconductors | 5.0% |
| Mastercard Inc. Class A | MA, -0.43% | U.S. | Finance/Rental/Leasing | 4.7% |
| Genmab A/S | GEN, -0.61% | Denmark | Medical Specialties | 4.5% |
| Novo Nordisk A/S ADR Class B | NVO, -0.60% | Denmark | Pharmaceuticals: Major | 3.9% |
| Keyence Corp. | 6861, +2.28% | Japan | Electronic Equipment/Instruments | 3.8% |
| Incyte Corp. | INCY, -0.95% | U.S. | Biotechnology | 3.8% |
| Naspers Ltd. Class N | NPN, +0.78% | South Africa | Specialty Telecommunications | 3.7% |
| Regeneron Pharmaceuticals Inc. | REGN, -1.64% | U.S. | Biotechnology | 3.2% |
| Source: FactSet | ||||
Fund performance
Both Chautauqua funds were established on April 15, 2016.
The Chautauqua International Growth Fund’s investor shares CCWSX, +0.08% have annual expenses of 1.05% of assets (considered “average” by Morningstar). The expense ratio for the fund’s institutional shares CCWIX, +0.00% is 0.80%, which Morningstar considers “below average.” Here’s how both share classes have performed against the MSCI All Countries World Index ex U.S. 892400, -0.09% (in U.S. dollars) through July 12:
| Total return - 2019 | Total return - 1 year | Average return - three years | |
| Chautauqua International Growth Fund - investor shares | 19.5% | -2.8% | 8.8% |
| Chautauqua International Growth Fund - institutional shares | 19.7% | -2.5% | 9.0% |
| MSCI All Countries World Index ex U.S. (U.S. dollars) | 14.0% | 1.3% | 9.2% |
| Source: FactSet | |||
The Chautauqua Global Growth Fund’s investor shares CCGSX, -0.22% have annual expenses of 1.05% of assets and the expense ratio for the fund’s institutional shares CCGIX, -0.22% is 0.80%. Here’s how both share classes have performed against the MSCI All Countries World Index 892400, -0.09% (in U.S. dollars) through July 12:
| Total return - 2019 | Total return - 1 year | Average return - three years | |
| Chautauqua Global Growth Fund - investor shares | 21.7% | 0.4% | 12.7% |
| Chautauqua Global Growth Fund - institutional shares | 22.0% | 0.7% | 12.9% |
| MSCI All Countries World Index (U.S. dollars) | 18.3% | 5.9% | 11.9% |
| Source: FactSet | |||
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