- Buying companies with global leadership positions within your industry can be a smart investment game.
- The manager of a $5.7 billion fund focused on doing so explained to Insider why.
- They also selected 10 companies that illustrate their search for stock picks.
The primary reason companies are brought into the $5.7 billion Brown Advisory Global Leaders Fund, rather than massive capitalization or major market shares, is their ability to solve the problem.
For co-managers Mick Dillon and Bertie Thomson, their selection process depends not on their vision of leadership, but on the perspective of the end customers.
“If you’re the best solver for your customer’s problem, they’ll think of you as the leader. They’ll keep coming back over time, generating a great business. While this may seem flippant, if you don’t have any customers.” Well, you have no business.”
Global leaders have a wide range of names from the biggest Microsoft, for other household names one can expect to display the criteria of both: companies with a competitive advantage; Strong Management Team; pricing power; higher margins than industry; and high return on invested capital.
In search of such characteristics, it is perhaps not surprising that Alphabet, roche, Tencent And Unilever The fund’s top 10 positions include
Running a concentrated portfolio of 30-40 names, of which 32 are currently in place, one can question whether trades could get crowded or move towards ‘expensive’ territory. Still Dillon stresses that taking into account the difference between value and value, valuation is important as a fund manager, but also from a client’s perspective.
“Price is the first point of comparison for many of us, but if you do a really good job for your customer, they start paying for the value.”
He gave the example of distribution. “It must be in stock, right?”, recalls the early-pandemic days of empty shelves, as toilet paper and flour saw their true value as supplies became scarce.
The pandemic sparked a new wave of ideas for the Brown Advisory team that had previously fallen short of its price target. One area under recent scrutiny is healthcare.
“We really like healthcare companies because they really help people, but our issues are more than evaluations,” Dillon said. Having been underweight healthcare for years, we’re finally starting to see some of these companies in a range where we could see double digits on the internal rate of return. [IRR, which can indicate future profitability] In five years, which we find very interesting.”
Pricing power and margin strength are two demanding fundamentals, especially in times of rising inflation. Rarely are these better examples than the cosmetics giant Estee Lauder,
With labor shortages affecting all aspects of manufacturing, distribution and consumption from raw materials, wages, logistics and petrol, the manager sees the problem as not only can companies pass on the high costs but whether their customers can afford them. Huh.
For example, take a US-based paint manufacturer that produces antibacterial paint for hospitals. “Talk about solving someone’s problem. What’s the biggest risk in a hospital? Re-infection rate. But if their costs go up, and they manage to get over it, are hospitals really that high? Can you pay?”
While that company piqued their interest, its limited ability to truly pass on high costs means it’s out of the portfolio.
Dillon explained the importance of price elasticity of demand and gross margin—the latter of which for Estée Lauder is 75%, he said, implying that if the cost of production increases by 10%, there is a need to cover it. Only 2.5% would have to be pushed through. cost of goods sold. While people will still trade down, any planned price increase will feel less extreme.
“How much will people see a 4% increase in the price of face creams if petrol prices are doubled?” he asks.
together Visa, master card, german stock exchangeAnd other financial names included in the portfolio – despite the ongoing debate over the sometimes-diminishing nature of sector classifications – pressed for a ‘preferred’ holding, a name that emerged.
While Dillon’s respect for Microlender bank rakyat indonesia Clearly, he would still resist falling in love with the stock if the price went beyond his comfort level. Thus, while the bank has been in the portfolio since its inception, it has been bought or sold multiple times since 2015 at the price alone.
“It is a fantastic business. They offer working capital loans to set up small businesses in rural villages of Indonesia. They will set up kiosks in wet markets in Jakarta, take money from stallholders, get people to set it up. Will lend, say a motorcycle repair shop, so they can buy some inventory to solve other people’s problems. From an ESG perspective, it’s just golden. From an investor’s perspective, we’re happy to make money.”