Want a stock that will thrive through the uncertainty of Brexit, the threat of a second European banking crisis and even the break-down of the Eurozone? You need to find a company that has control of their own future.
Many of our holdings are run and owned by the descendants of the founder. This makes them more aware of the risks
Mark Nichols, European equities investor for Columbia Threadneedle says that if you find a company with enough pricing power and an international market, politics does not matter.
“An unregulated monopoly is the ideal company for us,” he says of his Bronze Rated European Select fund, which he runs with Dave Dudding.
“We like businesses which generate lots of cash in sectors where there are big barriers to entry. This gives them pricing power.”
He cites Porter’s Five Forces of supplier power, barriers to entry, degree of rivalry, thread of substitution and buying power as ways to assess a potential holding. Companies with patents score highly, as do those with a strong brand and those who embrace innovation – equating to more predictable returns for shareholders.
If the process sounds familiar, it is because for Morningstar.co.uk readers it probably is. Porter’s Five Forces display more than a passing resemblance to Morningstar equity analysts’ five sources of economic moat. An economic moat is a structural competitive advantage that allows a firm to earn above-average returns on capital over a long period of time thanks to a network effect, intangible assets, a cost advantage, high switching costs or efficiencies of scale.
Nichols says that picking companies on this basis means he can afford not to worry about the macro so much – important at a time of such flux.
Nichols is also a fan of the owner-orientated model – meaning that the businesses he invests in are usually family run; majority shareholders with for than a little skin in the game.
“Many of our holdings are run and owned by the descendants of the founder. This makes them more aware of the risks, but more entrepreneurial too. They care less about the shorter term share price or next quarter’s earnings, but about building the business over the long term,” he explained.
Sparkling Returns from Top Drinks Firm
One such company is drinks firm Campari (DVC1), 51% owned by the founding family, this beverage producer has been on a two-decade long acquisition spending spree and still has cash to spare.
Campari was founded in 1860 and for more than 100 years more or less stuck to the production of just two products. But then in 1995 the group was forced to react to a changing market and took the decision to take on rivals rather than remain a niche player. What followed was 25 acquisitions in 21 years; the largest of which were Aperol, Skyy vodka and – just last month – Grand Marnier. In 2001 the group listed on the Italian stock exchange.
The transformative power of the Campari Group machine has meant that Aperol has gone from selling 3 million litres a year when it was bought in 2003 to 27 million litres today.
And the firm is working that magic on its eponymous drink too. In recent decades the flagship bitters was best associated with a decidedly older generation, but there has been a resurgence among the under 35s, launching the brand back into the limelight.
Of course, this is a competitive market – and despite having 50 premium brands in their stable, Campari Group is far from the largest player in the sector, coming in a sixth place. The degree of rivalry is high and buying power is low. But their brand strength is compelling and they show no sign of slowing.
“We target hidden gems, neglected old brands or new entrepreneurial launches,” said chief executive Bob Kunze-Concewitz, speaking in Milan last week. “You have to be patient and nuture brands but we also know which markets not to attempt. There are high barriers to entry in both China and India.”
Nichols holds the company in high esteem.
“Campari repeatedly hits their revenue target but really their appeal as an investment is their understanding of consumer trends and great brands,” he said. “They have a cultural heritage.”
Kings of Industry
Applying the same criteria across the market finds Nichols’ rival drinks producer Pernod Ricard (RI), the fifth largest holding in the Columbia Threadneedle fund, and building supplies company Kingspan (KGP). In the case of Kingspan, the current chief executive is son of the founder and the family own 58% of the shares.
“I think there is a misunderstanding as to what good value is when investing,” says Nichols. “A P/E ratio can be fudged – what you want is a reliable return on your investment. If L’Oréal cut their advertising spend today, then they would look significantly cheaper tomorrow. But in just a few years it would prove to be a bad value investment and the price of the shares would have fallen with sales.”
Nichols says that when interest rates are at record lows and threatening to fall further investors need to rethink what they can demand from a share and its buying price.
"You could have bet on almost anything and made money from the second half of 2011 to 2015, with perhaps the exception of commodities or banks. Now you should look for companies which have stable demand. If a company can grow 15% a year it will double your money in five years."
