My best investment - Ilario Di Bon, Head of Equities, Alliance Trust

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At Alliance Trust we focus on finding high quality companies, supported by compelling long-term themes, whose strong fundamentals are not fully discounted by current valuations.

Accenture is a perfect example of this. It is a global leader in the IT services industry, offering blue-chip corporations around the world cutting-edge outsourcing and consulting solutions. It has great reputation and a strong brand name. Success breeds success, so it maintains the ability to attract and retain the best talent. This is also reflected in its senior management team with the CEO and CFO having been at the firm for a significant amount of time.

Core to the story is the very nature of Accenture’s business model that allows it to generate significant returns on the invested capital. Compare the $3 billion it produces in free cash flow a year with the approximately $300 million it needs to reinvest in its business to sustain and grow its position. With a current cash position of around $4 billion, the issue is what to do with it rather than where to get it from. Management has been very disciplined in enhancing returns to create superior shareholder value.

Globally, we see a number of trends that support our investment in Accenture. Firstly, organisations in many sectors – especially financial – are experiencing waves of new regulation. Accenture can bring its expertise in terms of process and systems to help companies through this. When it comes to IT specifically, it has a wealth of experience implementing the latest systems and so can leverage this to help customers transition to the latest ways of working. It can also enable outsourcing efforts, again helping to reduce costs. In simple terms, if Accenture can work with a given company to add value by helping it work more efficiently and effectively, it can expect to be able to capture part of those savings to reward itself.

Finally, regardless of how exceptional a particular company is, an investment always needs valuation support. We see Accenture as currently undervalued by over 20% relative to its long-term intrinsic value. From a shorter term perspective, Accenture trades at around 10% premium to the S&P’s P/E, whereas historically its premium has been between 10% and 30%.