12 March 2020


    In difficult times we go back to our touchstones

    Between coronavirus, collapsing oil prices and increasingly nervous credit markets share prices are falling; heavily and swiftly. It is an unnerving time for investors.

    In difficult times we go back to our touchstones, the things we know have worked and that we know will work in the future.

    Buying great companies at bargain prices, companies that sell the goods and services that people need regardless of the economic environment, and that have little or no debt is a recipe for long term investment success. It isn’t easy when everyone is losing their cool and headlines are screaming at you. But it does work.

    We all have our favourite pair of jeans, that special place we most love in the world to stop, sit, and enjoy the view or for me the routine of my morning long black coffee. These familiar touchstones give shape to our lives and help provide much needed perspective to handle it’s up and downs.

    As investors we have touchstones. The things we return to make sense of the world, which as the last week has shown, can be volatile, full of conflicting opinions and frankly pretty scary.

    Our investment touchstones are not the things that make headlines. We don’t focus on macroeconomics, viral loads or daily market moves. Instead we are more like financial market librarians, noses buried deep in financial statements, or chatting on the phone to CEOs and thinking deeply about what shapes the future of an industry and its competitive landscape. All the time we are looking for those things that mark out a special business from the merely average.

    We know that if our portfolio is made up of these special companies that while prices will be volatile the underlying business fundamentals are sound and prices will recover. Volatility can then go from something to be scared of, to an opportunity. These touchstones and our investment process is what helps me sleep at night.

    That said it is worthwhile providing a perspective on what is going on in the broader economy and market and how that might shape how we manage your money.

    The Troubles

    They say that troubles come in threes. While I am not much of a believer in that conventional wisdom this time it might be right.

    1. First we had a global epidemic, coronavirus, threatening to curtail commerce, travel and the supply of basic goods which, in a worst case scenario, could dramatically slow economic activity, at least in the short term.

    2. Oil has now, literally and figuratively, been poured onto the coronavirus conflagration. Russia and Saudi Arabia over the weekend abandoned their OPEC+ commitments to restrict oil production. They have opened the spigots, pumping more oil at a time when demand is weak driving prices over 30% lower. They are very pointedly seeking to put some of their competitors out of business.

    3. The confluence of these two powerful forces had led to trouble number three; increasing stress in the credit market. Credit is the life blood of a modern economy. Companies use credit to pay bills, to invest for the future and to buy stock to sell to customers.

    Trust is central to credit markets. Creditors trust borrowers to repay loans when they are due, companies trust lenders to be there when they need access to capital. Remove that trust and credit markets begin to break down. For the first time since the outbreak of coronavirus credit markets have started to show signs of stress. This is a concerning development.

    While it is tempting to try and predict what will come next, this is fraught with difficulty. Getting it wrong, in either direction, can come at a big cost to long term returns. We largely try and avoid the temptation.

    Rather than seeking to predict the short terms moves in markets or economies we go back to fundamentals.

    Our investment touchstones

    Over twenty one years we have beaten the market and generated healthy returns by investing in hand-picked portfolios including some of the world’s best companies. Our ideal investments are in companies that supply the goods and services that we use every day, are well managed and are positioned to weather the storm of a more difficult economic environment.

    Focus a portfolio on these investments and add to them at attractive prices and the lessons from history are clear. Your portfolio will deliver attractive long run returns.

    While it is hard to do, we turn to these fundamental touchstones in these difficult market environments. At the core of this is the Fisher Funds STEEPP investment approach with our focus on quality growing companies.

    Specifically we look for companies with:

    1. A wide economic moat – a moat protects portfolio companies from competition and, in an ideal world, means customers are less likely to go elsewhere or are locked in. Think of software company Tech One in Australia. Just because the economy goes through a soft patch, it’s pretty unlikely Victoria University will change its student management and accounting software – it’s core to the university’s operations, very costly to swap out and the alternatives not always as good

    2. Long growth runways – while economic cycles vary over time we look for companies in long run structural growth industries. We know, for instance that less travel makes life difficult for MasterCard, but travel will recover, more and more payments are moving to its platform and it’s one of a very powerful duopoly in global payments.

    3. Essential goods and service – our ideal investment is in a company that provides goods or services where demand doesn’t fluctuate dramatically with the economy. Even if the Dow had a bad night, pet owners will still turn to Zoetis’s products to help a sick animal or mothers will still feed their babies a2 infant formula.

    4. Conservatively positioned – to enjoy the long term you need to be around for the long term. Companies with a lot of debt may not have that luxury in challenging environments. Our portfolio companies, in many case have no debt, or are typically conservatively geared. These was a key lesson from the 2008 Global Financial Crisis. Companies with too much debt become very risky investments in troubled times. We have not, and never will, forget that lesson.

    5. Well managed – last but not least having great management on your side in difficult times is very helpful. A great example of this is Mainfreight, a company well known for its leadership. In the Canterbury earthquakes the firm increased its already microscopic focus on providing excellent customer service. By supporting its clients through difficult times it gained market share and emerged stronger.

    Unfortunately, or maybe fortunately, for those of us with a few grey hairs this is not the first difficult market we have lived through. They always feel scary, it is always possible to envisage a doomsday scenario yet, like the end of a storm, the sun does shine again and the crisis become consigned to history.

    We firmly believe by focusing on fundamentals and potentially adding to investments at attractive prices this time it will be the same.