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.
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.
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.
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.
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.
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.