MERIAN
GLOBAL EMERGING MARKETS FUND

Discovering treasure

THE FOUR SECRET SOURCES OF MOATS

The phrase ‘economic moat’ was popularised by Warren Buffett. It describes the ability of some companies to maintain a competitive advantage over competitors. Companies able to accomplish this over a long period are rare. But those companies who can achieve it sustain long-term excess profits and market share.

NETWORK EFFECT

The value of a service increases as more people use it.

Examples of this are internet platforms such as Alibaba and Tencent, where the marginal effect of each new user is significant. Once a network reaches a critical mass it is very hard, and capital intensive, for another business to replicate it.

COST ADVANTAGE

The lowest cost producer in an industry can thrive, when in a price war it would be the last one standing.

For example, Brazilian car-rental company Localiza buys its cars more cheaply than competitors given the buying power provided by its 35% market share. Any competitor threatening it would need deep pockets.

SWITCHING COSTS

When it is too much effort, or too costly, for customers to change a product or service, a barrier to entry is present.

We are looking for businesses able to embed themselves into customers’ minds, products or processes, making them hard to replace. How many people still have the same bank as when they first started work?

INTANGIBLE ASSETS

Brands, customer lists, patents, and technological processes can allow a company to charge a premium.

For example, Kweichow Moutai is China’s leading producer of the nation’s fiery spirit Baiju and its principal brand Feitian Moutai (“flying fairy”) has unique luxury brand status. Moutai is made in limited quantities and demand far exceeds supply. It commands a price of more than US$200 per bottle.

1. A HIGH CONVICTION, CONCENTRATED PORTFOLIO

The fund focuses on finding supercompounders, companies that generate exceptional returns for shareholders over time. These are not run of the mill emerging markets companies. The fund’s process eventually results in a portfolio of typically 30-40 holdings. That’s quite a lot less than the 30,000 stocks in the global emerging markets universe.

2. A HIGH ACTIVE SHARE

The fund’s process results in a portfolio that is very different from the benchmark. In fact, the portfolio’s active share, a measure of the extent to which the portfolio differs from the benchmark index, was more than 80%*. This fund is different, and no closet index tracker.

*Source: MGI as at 31/07/2019.

3. UNCONSTAINED INVESTMENT

The fund invests across the market cap spectrum, including both large and smaller companies. We believe that opportunity
comes in different sizes. Some large companies have further to grow, and some small ones are destined to become large.

 

4. DISCIPLINED STOCK SELECTION

The key to our approach is disciplined stock selection. We demand that companies have a return on invested capital (ROIC) that is higher than their cost of capital (WACC). We also ensure that they are of high quality, and fully meet our environmental, social and governance (ESG) criteria. Yet even if a company achieves all that, we will not buy its shares unless they are at a reasonable entry price.

  • ROIC > WACC
  • High quality
  • Reasonable entry price
  • Integrated ESG
5. INVESTS IN COMPANIES WITH SUSTAINABLE MOATS

Some companies make greater profits than others, but that too is not enough for us. We are looking for companies able to keep their competitive advantage over time. The only way a company is able to do this, is if it has a strong, sustainable moat.

6. WHAT WE ARE NOT (AND SHALL NEVER BE)
Short-term traders

 

Macro gurus

 

Closet indexers

 

Trying to outperform in all market conditions

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