Is the SSB interview competitive
Interview with Columbia Threadneedle fund manager Moore | Diversification, sustainability and competitiveness
Mr. Moore, you focus on finding exceptional companies. What do you mean by that?
We look for three main characteristics: first, growth over the entire business cycle - we need to be confident that the company will be bigger in five years; second, the return on investment - attractive business figures and management that uses capital effectively; and finally, a consistently strong competitive position - the company's competitive advantage, what form the competition will take and how the company can withstand it. This is the most important factor as it determines the durability of a company's long-term growth and earnings.
How do you recognize a company's competitive advantage?
We spend most of our time on this question, and the answer is always nuanced. Various framework concepts help us with this: We consider Professor Michael Porter's Five Forces in order to understand the competitive dynamics of an industry. We also evaluate various sources of competitive advantage such as brand strength, switching costs and economies of scale - Morningstar has devised a very interesting structure to help us with our analysis here.
We try to put ourselves in the customer's shoes and understand their decision-making processes. Either way, if you go to a bar and order a Negroni cocktail, the bartender becomes Campari1 use to mix it. Campari has determined the Negroni since the cocktail was invented more than a century ago; they have a secret recipe and brand that has been promoted for more than 150 years. So it would be incredibly difficult to convince this bartender to use something else. This in turn gives Campari strong pricing power and attractive business figures.
Sustainability is another term that is popular these days - but many people understand it as an environmental, social and corporate governance (ESG) concept. How do you solve that?
As long-term owners, we need to believe that the companies in which we have an interest are well run. This means that they do not abuse their key stakeholders and do not harm the environment. Neither would be a recipe for long-term success. With the help of our quality filter, we have been able to avoid the more capital-intensive, polluting industries for decades - because we are not comfortable with the long-term environmental consequences, but also because the business figures are often unattractive.
How do you feel about governance?
Culture is not tangible, but it is one of the most important aspects of a company. One might be tempted to think abstractly about “extraordinary companies”, but in reality the companies are in a constant process of development. Thousands of decisions are made every day, and a large part of a company's long-term success will depend on how those decisions are made. Once we are satisfied with a company's profitability and competitive position, we focus on understanding its culture and the quality of its people. Management incentives must match those of our customers, and we want a wide range of talents and perspectives in the company. That is why governance is so important to us.
Some of the most significant decisions are related to capital employed: What should happen to the profits made each year? At Campari, for example, in addition to the attractive business figures, the company's management has invested these profits very effectively. They bought new brands that they have nurtured and expanded - including an aperitif drink from northern Italy called Aperol, which is now twice the size of the Campari brand!
How do you manage the risk?
My basic attitude is to be risk averse. While a concentrated fund may seem risky, to me the greatest risk lies with the companies themselves. The quality of the companies we own is our first line of defense; Knowing them exactly helps us to reduce the risk.
Diversification is also very important - we invest in a number of different sectors and industries. However, there are some sectors in which we can only find a few suitable ideas - these are often capital-intensive industries whose products are undifferentiated or regulated, such as utilities or banks.
Some argue that avoiding certain large companies or sectors is risky as it will cause it to deviate from the index. But from my point of view, the index itself is risky because it contains so many companies with mediocre or poor results.
What do you think of growth stocks versus value stocks?
I am not convinced that the distinction is particularly helpful, but I will formulate the answer in two different ways: first, on the question of cyclical companies versus defensive companies, and second, our attitude towards valuation.
For us, low volatility does not automatically mean high quality. Because of our long-term focus, our approach can survive volatility. So we're not ruling out cyclical companies. Take Sika, for example. This is a Swiss company that produces chemicals for the construction industry - its products change the profitability of construction projects and also help the environment (as they save time and water). Sika is exposed to the construction cycle, but it also has clear growth impulses in every environment as the buildings become more complex. It has an asset-light business model, a strong brand and a great corporate culture - so it's a good example of an exceptional cyclical company.
Let's get to the assessment: an exceptional company is not necessarily an excellent investment. When we buy a company, we think about our potential return on investment in terms of the cash flows it generates relative to the price we pay. While we do not compromise on quality, we are very sensitive to evaluations. There is constant competition for capital in terms of what goes into the fund and how it is weighted.
What lessons have you learned from 2020 and COVID-19?
2020 taught me a lot. If I had to pick one point, it would be the precious reminder that bad things happen (Forrest Gump put this more easily!). But as Howard Marks says, “You can't predict anything. You can prepare. " We can't predict exactly what will happen or why it will happen, but we can be prepared by focusing on companies strong enough to withstand severe shocks.
So our approach hasn't changed at all - if anything, we're even more convinced of the importance of finding exceptional companies that can weather the storms on their way.
1 The naming of certain companies does not constitute a recommendation.
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