2021 Grand National: Why horses for courses applies to the investment world
With a history dating back more than 180 years, the Grand National is undoubtedly one of the biggest...
30 August is legendary investor Warren Buffett’s birthday – the man who transformed Berkshire Hathaway from struggling textile company to multinational conglomerate, and who has banged the drum for value investing throughout most of his career. He was 88 this year and is still managing money.
One of the concepts he has made commonplace in the investment world is the ‘economic moat’, which is the idea that a business has such a strong competitive advantage over its peers that its profits can remain protected from market competition for a long time to come.
Buffett is seen as one of the most influential figures in the world of investing to date. Rather than send him cake in the post though, we asked four Elite Rated fund managers for stock examples in their portfolios which either exhibit a trait which Buffett would approve of, or which were chosen based on principles from their own investment heroes.
Managers Hutch Vernon and Maneesh Bajaj actually invest in two stocks which are significant holdings in Berkshire Hathaway’s own portfolio: Apple Inc., and Wells Fargo.
“Apple’s business appeal is recurring revenues from replacement demand for its phones, computers and apps. This leads to good margins and high returns, a cash-rich balance sheet which means it can buy back shares, and it is priced at less than what we believe the business is worth.
“Apple is no longer the growth dynamo it was beginning a decade ago when the iPhone was first introduced but it continues to make attractive levels of business progress and recently became the world’s first $1 trillion company.”
Hutch and Maneesh describe bank Wells Fargo as boasting historically good returns, having solid lending discipline and spending the cash on its balance sheet wisely. But, for the past two years, they said the company has had to reinvent its business practice, since revelations about the opening of unauthorised accounts and aggressive sales practices came to light.
“This has hurt the reputation and profitability of Wells in the short term and caused its stock to flat-line while most other banking stocks have gained strongly,” Hutch and Maneesh added. “The opportunity in Wells arises from putting this uncharacteristic episode behind it and recovering its earnings momentum and valuation premium to other banks.”
Manager Alex Savvides scours the stock market for mispriced or undervalued companies undergoing a transformation. While this is a different approach from the ‘classic value’ school of investing espoused by Buffett, Alex holds shares in Electrocomponents, which has the quintessential Buffett characteristic: an ‘economic moat’.
“In the case of Electrocomponents – which is a global distributor of electronics – its moat is the company’s market-leading customer service proposition that has become self-enforcing and which we believe insulates it from competition,” the manager explained. “The scale, complexity and cost of the network needed to ensure that customers around the world can easily find, order and swiftly receive one of thousands of different components stocked by the company underpins its market dominance.”
Manager Simon Moon said paper manufacturer James Cropper is another good example of a business with an ‘economic moat’. He said the company, which has a mill in the Lake District, is not ascribed a valuation which reflects its true potential.
“Cropper’s ‘economic moat’ lies in their know-how and intellectual property: they’re the only company that can provide environmentally friendly moulded paper packaging in any colour; they have a specialist patented Technical Fibre division, and they even provide radiation-absorbant material to the defence industry. The level of investment in Cropper, both in terms of technical expertise and manufacturing capability, provides a sizeable barrier to entry.”
On a slightly different note, manager Lesley Duncan said colleague and small-cap veteran Harry Nimmo has had a strong influence on her approach to portfolio management.
An example of a stock in her portfolio which reflects this is Howden, because it has a proven, cash-generative business model with a durable competitive advantage.
“The company manufactures and sells its products to small local builders throughout the UK via its own network of depots,” Lesley explained. “Howden has a well-executed roll-out programme and provides a genuinely unique service for trade-only builders.
“It has been excellent at capturing the market shift from ‘Do-It- Yourself’ to ‘Done-For-You’ in the kitchen market whilst also capturing the increasing consumer demand more style and functionality.”