Portfolio companies that stand the test of time

Portfolio companies that stand the test of time

The average firm life in the our portfolios is approximately 90 years. This is an exceptional and striking figure for a multifaceted, globally diversified portfolio, especially when viewed in context of the novelty-seeking investment behavior that seems to describe common practice nowadays. Hence, it is fair to say that company longevity is one of the main differentiating factors in our investment selection. To make clear from the outset for the discussion that follows, it is not our thesis that firm maturity per se will lead to good investment returns. We can probably all name a range of iconic, in some instances century-old businesses that spectacularly fell from grace.

Having said that, long-lived firms come with certain virtues we appreciate, both regarding company features on the one hand and investment analysis on the other. As far as corporate characteristics are concerned, we see three distinctive advantages. First, seasoned firms have proven that they are skilled in stakeholder management. Relations with customers, suppliers, employees, financiers, shareholders and regulators tend to be sound and well structured. For example, Japanese firms have long been famous for adhering to their typical holistic stakeholder codex. This may partly explain the resilience they have been able to demonstrate subsequent to the bursting of the economic bubble in 1989.

Second, longevous firms can often be found in mature industries which we have long been partial to, notably: (1) basic services like electricity, sanitation, heating & ventilation, telecoms, logistics & transportation and traditional media; (2) energy and materials processing; (3) and the manufacturing complex including the production and maintenance of a broad range of machinery, industrial equipment and capital goods. Often these types of businesses tend to benefit from an oligopolistic industry structure marked by formidable barriers to entry, high switching costs and a well-established regulatory framework. These features foster a stable and predictable business environment in which to conduct day-to-day operations as well as to make mid- to longer term strategic plans.

Third, many history-proven companies possess strong brands and/or a diverse portfolio of valuable trademarks and patents. Not rarely they enjoy a high reputation in the marketplace, widespread recognizability and undisputed customer acceptance. These traits tend to lift those businesses’ implied goodwill and may attract interested third parties. As a result, there could be a hidden “valuation floor” attributed to coveted assets, signifying that a buyer-in-whole may have to pay a substantially higher price than the current quotation on the stock exchange.

Now in terms of our role as analysts, it comes with the territory that long-term investors are drawn to businesses with an extensive operating history. In our specific approach, we believe that it improves the clarity and explanatory power of the input data we rely on in our ongoing quest to (1) search for, (2) evaluate and (3) value individual companies. This is an important element of the so-called “circle of competence” we live by to narrow down and sharpen the scope of our investment analysis.

First, our search process discards most firms with a short and untested past, thereby eliminating a host of potential analytical risks right at the beginning. Second and by extension, the evaluation process becomes more revealing when we can study how firms have conducted themselves during past bouts of macro- and socioeconomic, industry- and/or company-specific difficulties. And third, it further follows that being able to work with actual figures generated over many years improves the statistical data set we need to perform our valuation analysis. That is, since we rely heavily on the discounted free cash flow method, forward-looking estimates become more robust and meaningful if we can “normalize” a firm’s past financial record.

In sum, at least for us in the deep value investment space, we find that we get a better analytical grasp of long-lived firms as compared to unseasoned ones. This reduces uncertainty, enhances the achievable risk-return profile for the Fund and raises the efficacy in our daily work. 

Sincerely,