We are stock pickers. At the heart of our approach is a conviction that inefficiencies exist in the valuation of “exceptional” companies. Specifically, we note that durable, cash generative franchises are not only rare but also appear to us to be undervalued by other investors for most of the time.
In looking to protect and grow the real value of our clients’ capital over the long term, we expect to outperform market benchmarks, which is not a trivial challenge and gives further validation to investment skill. We manage client portfolios with a distinctive attitude to risk and, in line with our long-term investment horizon, we rarely change portfolio holdings, which has the added benefit of keeping transaction costs to a minimum.
What Makes Our Approach Distinctive?
Our portfolios are highly concentrated in what we judge to be exceptional businesses.
We consider risk as the possibility of losing permanent value on committed capital and believe such risk can be better reduced by portfolio concentration in companies where we have the highest conviction, rather than diversification.
Our valuation work generates price targets very different from those of other investors.
We think that investors often use inappropriate equity risk premiums in valuation models - too high for exceptional businesses, too low for the mediocre.
Our primary research focus is on companies that can achieve sustainably high returns on capital.
We are not overly concerned by the short-term earnings performance of companies we invest in. Our research efforts are focused on identifying companies with durable competitive advantages.
Our portfolio turnover is unusually low.
When we find an exceptional business, we intend to hold it for the long term, which for us means several economic market cycles.
“Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”
Warren Buffett
Investment Process
Portfolios are constructed without reference to benchmarks and our portfolios therefore look very different from the market index.
The characteristics we seek in our investee companies are: heritage, predictable earnings (through pricing power and/or intellectual property), low capital intensity and sustainably high returns on capital. Reflecting these characteristics, we find the majority of our candidate investments in a select group of broad industry categories. These are:
- Consumer Branded Goods
- Internet/Media/Software
- Financials
- Pharmaceuticals
We value all our candidate investments using a variety of approaches, the most important being a discounted cash flow calculation. Those that appear best value to us form the portfolio.
Once we have committed to a company, we are extremely reluctant to sell it except if the stock price moves sufficiently beyond our judgement of the company's intrinsic value when we realise that the premise for the investment is no longer valid. This reflects our conviction that owning great companies for the long haul makes sense and that transaction costs are a tax on our clients’ capital, a tax that we cannot avoid altogether but that we can minimise by dealing infrequently.
There is no question that our approach requires patience. Resisting the temptation to trade or just “do something” requires a high conviction in one’s investment thesis and also the ability to ignore market chatter and remain focussed on a company’s competitive advantages.
