How active management can beat the stock market
Leading global stock markets haven’t risen very much over the last 22 years. Despite some peaks and...
We live in times of immense change. Shifting consumer habits, demographic challenges, and disruptive technologies are impacting virtually all aspects of our lives. This can be a problem for companies and industries trying to keep up with these changes. Some do so and reap the rewards, others simply fail.
Alexander Darwall, who manages two Elite Rated funds, has developed a real aptitude for recognising patterns of success in company business plans and management teams. We caught up with him to find out how he does this, and which industries he thinks are presenting the most exciting opportunities today.
“My team and I look for patterns of success across business models, favourable industry structures and truly ‘sustainable’ companies in the sense that they have a credible, profitable business. We like companies that are in control of their own destinies, that have pricing power and flexible business models. These companies tend to operate globally and are in industries that have high barriers to entry.
“We look for business models that are likely to be winners from disruption, whether from changing consumer habits, technological changes or regulation. Our entire investment process flows from this in-depth knowledge of the business and management.
“The majority of my time is spent engaging with company management teams and their boards to discover exactly how they run their business. I only invest in companies that I confidently believe have the right long-term vision, appropriate levels of investment, sensible succession planning and have, ideally, a creative tension between the chairman and CEO.
“Across the Jupiter European Growth strategies – which includes Elite Rated Jupiter European and Jupiter European Opportunities Trust – my team and I hold around 35 companies that we judge to be ‘special’. These are companies that we believe can perform throughout all market conditions, regardless of economic trends.
“The cruising industry is a really interesting one. It is dominated by three global players and there are very high barriers to entry: a company entering the industry needs a vast amount of capital – just a single cruise liner can cost $1 billion to build and they would need a whole fleet. A strong brand name is also required to source passengers from a fragmented, global customer base. A flexible production and sales model would also need to be established.
“Flexibility is a key attribute of the cruising industry in other ways too. If one country goes into recession, the company can source more customers from other countries. Or if a route needs to be altered, perhaps because a particular itinerary falls out of fashion, the company can send ships elsewhere. This level of flexibility combined with high barriers to entry make it extremely hard for new comers to compete with the giants of the cruising industry, and history has shown us that few try to do so.
“The established players also stand to benefit from technological disruption and changing consumer behaviour. For example, new technology has enabled more sophisticated booking systems to improve ticket pricing efficiency and management. In addition, contactless payment methods on ships can encourage more consumer spending. As companies learn more about their customers through the booking process and spending habits, they can also address consumer expectations of a more personalised holiday. The improved experience explains in part why demand for sea cruises has been growing faster than tourism to land-based alternatives.”
“Healthcare is another sector where we believe winners will emerge, in this case due to industry disruption and regulation. One interesting area are clinical diagnostics equipment companies that are benefiting from changing technology and regulation. New syndromic diagnostic technologies determine whether patients have an infectious disease in record time, enabling treatment to begin sooner and freeing up hospital beds where they are not needed.
“Against increasing concerns over the rise of antibiotic resistance, diagnostics companies are benefiting from the drive from health authorities around the world to stem the overuse of broad spectrum antibiotics. Health authority concerns over mitigating pandemics and reducing the spread of infectious diseases (such as respiratory illnesses and meningitis) are also contributing to demand. Accurate diagnostics also have a role to play in speeding up the search for new antibiotics, as the technology can accurately isolate the disease in trial patients.
“Structurally, the clinical diagnostics industry has several attractive features. There are high barriers to entry – any new entrant to the market needs to meet strict regulation (such as FDA approval, which can take several years) and beat high technological standards from existing players.”
“I believe that a consistent approach to investment has the best chance of achieving a consistent outcome. That is why my team and I continue to engage with the great entrepreneurs of today. Our approach is to understand the inner workings of strong companies, rather than speculating on whether the economy is in a “bull” or “bear” market. There are many exciting opportunities in Europe arising from change and disruption and we continue to work hard to find them.”