A top-9% fund manager shares how he built an ‘anti-fragility’ portfolio that outperforms in bull and bear markets — and shares 8 of his favorite investments to make now

• A leading fund manager shared how he’s beaten his index in up and down markets.
• His investing strategy involves prioritizing free cash flow and valuations.
• Here are four market sectors to target now and four international stocks set to dominate.

In the two and a half years and two months that Elias Erickson has been running the Ninety One International Franchise Fund (ZIFIX), he has outperformed during several market regimes.

According to Morningstar, his foreign-focused, large-cap growth fund is in the top 9% of its category in 2023, with a 4.8% gain versus a 0.5% loss for its index. This comes on the heels of a top-12% finish last year, when it lost ground but outperformed its benchmark by 3.5 percentage points.

Despite all of the changes in markets and the economy since August 2021, Erickson’s track record and investing strategy have remained consistent.

“When we’re thinking about macro, it’s more from an adaptability, anti-fragility lens and constructing a portfolio that will be adaptable through a variety of different economic and macroeconomic environments,” Erickson said in a recent interview with Insider. “And so we don’t recalibrate the portfolio much year in, year out or rebalance it for different macro outlooks.”

Look for top-tier stocks while paying a reasonable price.

Unlike many other managers, Erickson limits his fund to a few dozen stocks. His bottom-up stock selection process carefully examines each potential entrant to determine whether it is a high-quality business that can grow in any economic environment.

“We’re looking for a combination of attributes with thresholds for each of those attributes being quite high, and that sets the profile of the fund apart,” Erickson went on to say. “Whether you use style analytics tools or others, it’s based on empirical measures.” We have a statistically significant and consistent exposure to quality than our competitors.”

First, Erickson employs the eye test to ensure that a potential investment stands out from the crowd. He’s looking for measurable, long-term advantages that a company has, such as software code, patented technology, or global scale through a network built over decades.

After determining whether a company is sufficiently distinct from its competitors, he examines its debt load and capital intensity to see how it would fare in an economic downturn.

However, cash flow is the best indicator of a healthy business, according to Erickson. Growth-focused investors are concerned with whether a company’s revenue and user base are increasing, whereas value-oriented managers are concerned with profit proxies such as earnings before interest and taxes, so his approach is unique.

“We’re focused on free cash flow per share as our measure of intrinsic value, and how that progresses through time is going to dictate whether or not we find the opportunity interesting,” Erickson said in a statement. “All of the different attributes of our philosophy are built around increasing our conviction in the underlying progression of intrinsic value, again, as measured by cash flow.”

Erickson employs secondary metrics such as a company’s internal rate of return (IRR) and enterprise value to EBIT or EBITDA. To ensure that all of the good news isn’t priced in, it’s critical to confirm that a stock is priced fairly relative to how much cash and earnings it will generate later.

“The critical thing is to find quality businesses, virtues in combination, and then not to overpay,” Mr. Erickson said.

The top eight investments to make right now

Many US-based investors avoid international stocks entirely, believing that the group is risky due to its increased exposure to geopolitical conflict.

Erickson, on the other hand, believes that’s painting with too broad a brush. Foreign stock indexes may have lagged behind the S&P 500 in recent years, but he believes there are many excellent investment opportunities available overseas that can improve returns while diversifying a portfolio.

“For those that do have this home bias, that prefer the US, the competitive structure, the way that the economy is constructed, the US economy is replete with international businesses,” Mr. Erickson said. “And so to participate in the US economy in a full sense, you need to own international businesses.”

According to Erickson, international stocks in four sectors look especially promising right now: consumer discretionary, consumer staples, healthcare, and information technology.

According to the portfolio manager, those groups have high quality characteristics, require little capital, and are not overly reliant on external financing or the economy. Companies in these segments of the market can generate their own growth and frequently enjoy predictable recurring revenue.

Erickson is a fan of luxury goods maker Hermes (HESAY). He noted that the 186-year-old French fashion house has a vertically integrated supply chain, which means it controls every aspect of its business. According to Erickson, it is also less vulnerable to recessions than its peers.

“They have more waitlists for their handbags, and their clientele are the upper echelon of the affluent,” Erickson told me. “As a result, they have an interesting asymmetry in their growth profile in that they are more defensive than the typical luxury company in a market downturn but participate in all, if not more, of the broader growth.” They also do an excellent job of balancing the paradoxes of scarcity and growth.”

Defensive segments of the market, such as staples and healthcare, also fare well in downturns because demand for their products and services does not typically wax and wane. Within that latter sector, he is particularly interested in pharmaceuticals, medical devices, and healthcare services.

Erickson also singled out three companies in the technology or technology-related industries.

His largest holding is the German software company SAP (SAP), which is focusing more on subscriptions with a multi-year conversion upgrade cycle for its enterprise resource planning (ERP) products. He believes that decision will ensure SAP’s long-term sales stability.

Mastercard (MA) is Erickson’s second-largest position because, despite being headquartered in New York, the company generates roughly two-thirds of its revenue outside of the United States. According to Erickson, the credit card network has a massive competitive moat, which protects it from would-be competitors. It will also benefit from the ongoing surge in digital payments.

Finally, TSMC (TSM) is a top-10 holding in Erickson’s fund because it manufactures more than half of all chips, including an astounding 85% of high-performance semis. TSMC is a natural fit in the portfolio due to its unrivaled moat and rain-or-shine resilience.

“To the extent that if an order is canceled and they have some capacity that frees up, there’s a waiting list to get that capacity,” Erickson went on to say. “As a result, when they do encounter some challenges, there isn’t much of a hiccup operationally.” As a result, this speaks to some of the resilience characteristics that we seek.”