Our ambition is to generate attractive long-term total returns in real terms. In order to achieve this, we apply the following principles:
We are equity investors
Given our mindset and skillset, we believe the equity component of the capital structure creates the best opportunities for us to grow our capital over time.
We invest in great companies
Our belief is that long-term returns are a reflection of underlying business performance. As a result, we try to identify great businesses primarily based on the following criteria:
Sustainably high returns
We define this as generating a high ROCE over a long period of time. In our experience, these high returns are often the result of competitive advantages e.g. in the form of strong brands (e.g. at Diageo, LVMH and Hermes), a unique culture (e.g. at Berkshire Hathaway and Markel), being a trusted provider of critical products or services (e.g. at Coloplast, S&P Global/Moodys and KONE/Schindler) etc.
Ability to reinvest
We look for businesses with an ability to grow over time through reinvestment in the business at those sustainably high returns. Often this means finding companies that have substantial scope for geographic expansion, extensions in terms of product range, potential to increase penetration of its product or service, potential to gain market share, opportunity to consolidate an industry through acquisitions etc.
Strong governance
In order to be able to reinvest significantly into the business, we look for shareholder structures that enable management to take a long-term view and that give them the ‘capacity to suffer’ i.e. the ability to withstand short-term pressures to maximise reported earnings in exchange for long-term value creation. More often than not, this means investing in family controlled businesses for us. We also want to see evidence of great integrity in dealing with all stakeholders and regard for minority shareholders. Ultimately, this should enable us to participate in the wealth creation of the underlying businesses in which we are invested.
We take the very long-term view
Our investment philosophy is based on the belief that returns to shareholders will reflect returns in the underlying businesses over very long periods of time. As a result, we only invest with an intention never to sell our positions.
We of course recognise the importance of being pragmatic and prepared to change our view on an investment in some cases e.g. when circumstances have changed or when we learn new things about a business that lead us to reappraise the quality of that business. However, we do not buy into a company with a view to exiting our position.
We focus on downside protection
It is our firm belief that the best way to generate attractive long-term returns is to focus first and foremost on not losing money. We try to achieve this in a number of ways, both at the company-specific level and at the portfolio level.
At the company-specific level this includes looking for companies with robust revenue generation (e.g. through a high proportion of recurring revenues), flexible cost structures (in order to limit operating leverage in a downturn), strong balance sheets etc.
At the portfolio level this includes some element of diversification across geographies and sectors, avoiding leverage, considering the liquidity of our holdings etc.
In addition, we aim to continuously improve our process e.g. using investment checklists, challenging our ideas through participation in investor networks and the use of expert insights etc.