As Steve Jobs stated: “Making an enduring company was both harder and more important than making a great product.”
A primary assumption of any good business is that it will be operational well into the future. No matter how impressive some short-lived businesses may be, we generally prefer to invest in companies that have withstood the test of time.
Identifying resilience
An important source of companies’ resilience comes from the durability of their competitive advantages, structural growth tailwinds and a proven ability to execute plans over time. We further protect ourselves from the risk of permanent loss of capital, by minimising exposure to companies with excessive leverage, obsolescence or exposure to environmental, social and governance (ESG) risks.
Even the best company fundamentals, combined with the most capable management team, will only be able to deliver solid shareholder returns if it operates in a favourable industry structure, for example, through competitive positioning within a sector, as well as the sector’s long-term prospects for value creating growth.
In financial services, for example, we have stayed away from investing in large commoditised banks and instead seek companies with a differentiated positioning that’s harder to replicate and benefit from secular tailwinds toward new financial market penetration, such as Hong Kong-based life insurance company AIA and Indonesian microlender Bank Rakyat.
Meanwhile in the industrials sector, resilience comes from companies that benefit from a significant after-market component or subscription-like revenues from maintenance or service contracts, like Swedish compressor business Atlas or French aerospace engine manufacturer Safran.
The ability of management teams to execute well and be truly long-term focused is also another key consideration. Companies like Roche, LVMH and Atlas Copco are managed on a multi-generational timeline beyond the investment horizon of most investors today. We believe this management approach is a crucial element in creating an enduring business with sustainable competitive advantages and attractive capital deployment opportunities.
Bottom-up long-term approach in a volatile macro environment
Another important consideration is a company’s longevity and endurance – especially through events such as the early 2000s recession in developed markets, the global financial crisis and the Covid-19 pandemic. Indeed, many businesses have emerged stronger and thrived in the period that followed.
The resilient characteristics of investments should also be demonstrated by their ability to withstand the current inflationary cycle and supply chain challenges. For example, LVMH and outsourced food services provider Compass Group have been able to fully offset the impact of inflation, while others such as Unilever have been able to pass on most of it with the expectation that they should be able to recover the remainder through mix and innovation over time.
At the same time, it is reassuring to see that pricing actions have been taken with integrity and none of these companies are looking to exploit what is no doubt a tough operating environment for their customers.
Similarly, while ongoing supply chain constraints could eventually translate into either higher cost of production or input costs, competitively advantaged businesses should be able to pass on these costs to customers in a thoughtful manner, while preserving their long-term profitability.
Long-term investing
For long-term investors, the rational for holding businesses should not be predicated on narrow predictions of the future.
High quality, free-cash-flow generative companies with compelling business risk dynamics not only represent good long-term investments, but also attractive opportunities in the current environment of global uncertainty.
Priyanka Agnihotri is the portfolio manager of the Brown Advisory Sustainable International Leaders fund. The views expressed above should not be taken as investment advice.