Sandy Nairn‘s Edinburgh Partners recently filed its 13F with the SEC for the reporting period ending September 30th. Edinburgh Partners is a Scotland-based hedge fund specializing in International, EAFE, Global, European and Emerging Market equities founded by Mr. Nairn in 2003. Prior to founding Edinburgh Partners Sandy Nairn served as the chief investment officer of Scottish Widows Investment Partnership and before that he spent a decade working under investing legend John Templeton at Templeton Investment Management. Although Edinburgh Partners boasts of over $12 billion in assets under management, according to the latest fling its U.S. equity portfolio – which till a few quarters ago was worth $2.4 billion- accounted for only a fraction of that at around $950 million, as of September 30. The primary reason why Edinburgh Partners has been cutting its exposure to U.S. equities in the past few quarters was revealed by Mr. Nairn in an interview conducted a few months ago, in which he said:
“On a valuation basis pretty much everywhere looks more attractive than the US at the moment. If equity markets in aggregate are now at fair value or higher, in the US they are well above fair value. Profit margins are already at record levels in the US and merely to keep the market on the same high earnings multiple as today will require margins to move even higher over the next two to three years. This is something we have spent a lot of time on, as it has been a consistent theme both in the individual stocks we research and in aggregate.”
“Our research suggests that this is highly unlikely. Even if you assume that earnings grow no faster than their long term average rate over the next five years, for the US market to rise a further 10% over the next two years the profit margins of US companies will need to rise yet further. That would not only be a record high, but more than twice their long run historical average. We do not think that can or will happen. It is not a credible assumption.”
Even though Mr. Nairn considers the U.S. markets as a whole to be overvalued, according to the Edinburgh Partners’ 13F filing the firm still owns a considerable stake in several U.S. companies and also initiated a significant stake in two companies during the third quarter. Considering both these facts, it is obvious that Mr. Nairn expects the companies in his portfolio to perform well even if the performance of U.S. market overall disappoints in the short to medium-term. That’s why in this article we will be taking a closer look at some old favorites of Edinburgh Partners and the companies in which it initiated a stake recently.
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Microsoft Corporation (NASDAQ:MSFT) remained the largest holding of Edinburgh Partners at the end of third quarter even though the firm trimmed its stake in it by 7% during July-September period to slightly above 2.3 million shares worth $102.22 million, as of June 30. Shares of Microsoft Corporation (NASDAQ:MSFT) saw extreme volatility during the third quarter, but ended it nearly flat and are also currently trading flat for the year. In an event earlier this month the company launched a new device ‘Surface Book’ and made updates to some of its existing products including Lumia phones, Surface Pro and Microsoft Band. Microsoft Corporation (NASDAQ:MSFT) is scheduled to report its third quarter earnings on October 22 and analyst expect it to better the $0.54 EPS it reported for the same quarter last year by declaring EPS of $0.59 for the quarter. Among the hedge funds we track, Jeffrey Ubben’s Valueact Capital was the largest shareholder of Microsoft at the end of second quarter owning over 75 million shares. You can find Ubben’s Microsoft investment thesis – which was shared in a ValueAct investor letter- here.
