- Columbia Threadneedle's David Dudding is compiling a strong track record at his global and European funds.
- While many investors hunt for companies with wide and growing profit margins, Dudding says he'd rather see companies give up some profits to invest in themselves.
- That's helped his stocks during economic downturns, and he spoke with Business Insider about five examples.
- Visit Business Insider's homepage for more stories.
One of the best ways to get a struggling stock to turn around is a big improvement in its profitability. After all, one reason investors love tech stocks is that they're remarkably efficient at making tons of money.
But is there such a thing as too much of a good thing?
Fund manager David Dudding of Columbia Threadneedle Investments says that sometimes, fantastic profit margins are a warning sign. While he's naturally looking for profitable companies and has substantial investments in tech, he says he wants to see companies that are planning ahead.
"We don't want to see margins sort of going through the roof, because maybe that's an example of companies taking too much profit in the short term," he said. "What we like are companies [where] maybe the margins go up a little bit every year, but not as much as they could do."
Dudding says it's often wiser for companies to plow money back into advertising, product development, and other areas that will improve their businesses over the longer term.
"We quite like looking at things like R&D as a percentage of sales or advertising and promotion as a percentage of sales," he told Business Insider in an exclusive interview.
That's helped Dudding pull in great returns at the Columbia Select Global Equity Fund, a global portfolio he's managed for almost six years. An investor who put money into the fund when Dudding started in January 2015 would have more than doubled their money today, enjoying a return of 116.8% as of Friday according to Morningstar.
The S&P 500 is up 74.5% over that stretch, and US stocks have long outperformed international ones.
While it might be surprising, Dudding says his approach to spending might actually be more effective during downturns like the one that hit in 2020.
"During a recession is when you want to sort of step up your advertising and promotion budgets in many ways, because you're getting more bang for your buck," he said.
This year he's returned 18.5% to investors, crushing the 4.9% return of his benchmark, the MSCI All-World Country Index. His return is almost triple the average for non-US large-cap growth funds.
Dudding is also on a strong run with his Threadneedle European Select Fund, a fund available only to European investors that is bringing in similarly dominant results compared to European stock funds and its own benchmark.
The outperforming investor detailed for Business Insider five companies that he's invested in that are thriving because they've adopted a wise approach to investing in themselves.
The French cosmetics giant has had a strong year, and Dudding says its investments in technology and marketing are both paying off. He said its acquisition of augmented reality company ModiFace really paid off in 2020 when shoppers weren't coming to stores.
"They could easily cut advertising and promotion spend, and that would make their numbers look really good, but it would be a very short term response," he said. "When times are tough, they win market share. And then you keep those customers for many, many, many years."
Dudding says that Mastercard gets dinged for having smaller profit margins than rival Visa, but the company spends its money well, and will benefit from the shift to mobile and digital payments.
"They're continually reinvesting in things like security, for example, which are absolutely vital, and it means that they have the trust of their partners and consumers," he said. "They're just playing a very long game, and we like that and appreciate that."
The German sporting goods company, like some of its competitors, was forced to adapt after the pandemic closed many of its stores and gnarled manufacturing and shipping around the world. But Dudding says the situation is working to its advantage now.
"Previously these companies relied a lot on wholesalers, and now they can do much more direct to consumer business. That's great. You're closer to the consumer, you get less product recalls, so you're selling more full price products, and you maintain your grip on pricing."
(4) Kotak Mahindra Bank and (5) HDFC
Dudding explains that he's bought stock in these two Indian banks because the country's growing wealth and population are creating a huge opportunity.
"From about 1990 to 2020, the growth rates probably compounded at sort of 6%, 7% a year, which is pretty staggering," he said. "The leading private sector banks in India are taking huge amounts of market share because they can invest in their internet banking offering when the state owned banks can't do that."
Kotak Mahindra is the second-largest bank in India and a national leader in fields like life insurance and asset management. Dudding has high praise for founder and CEO Uday Kotak. But even though it's grown rapidly since its founding in 2003, he says the company is very cautious with its money.
"They don't want to take things too fast too soon, and it's paid off in spades over many, many years, and we're very happy longterm shareholders," he said.
Rival HDFC, meanwhile, is a popular pick among investors seeking exposure to the trends Dudding talks about, or to emerging market growth in general. He agrees, and adds that it's run almost as cautiously as Kotak Mahindra.
"That's also an outstanding, outstanding franchise," he said. "With banks, we're was quite concerned about the return of our capital rather than just the return on our capital."
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