INTERVIEW
THE INVESTOR
|
23
redeploy this in a manner beneficial to
shareholders.And finally, these businesses
should have strong corporate cultures.
You talkabout investing across a
valuechain. Canyouprovidean
exampleof a long-standingvalue
chainwithinyour universe?
GL:
For two decades we have studied
the dental industry.What is interesting
to us is that this industry has historically
grown at mid-single-digit rates and has
proven to be recession-resilient.Many
of these businesses grew earnings per
share, even in the recent recession,
which is a testament to their resilience.
We have followed companies across
this value chain, including distributors,
manufacturers, equipment makers,
implant makers and other niche players.
Their positive growth dynamics are
likely to continue for a long time.Ageing
populations in the developed economies
will increase spending on dentistry, while
those in developing markets who did not
previously have access to, or money for,
dentistry are now seeking dental care.
What responsibilitiesdoes the
qualitativefield research team
haveandcanyouprovidean
exampleof a recent project?
Chad Clark:
We have a team of seven
individuals who are tasked with obtaining
proprietary information from in-depth
investigations.One recent project
involved a hearing device manufacturer
that had 70%market share, great margins
and strong returns on capital.We were
trying to understand why it was so
successful, so our qualitative team spoke
with leading audiologists in order to
better understand the reasons behind
the company’s outsized market share.
At the time, its valuation was too high
for us to consider investing, but we were
waiting for a dislocation, which came in
2011 when the company had its first-ever
product recall.The shares fell 50% in two
days.We were able to go back to these
audiologists and establish the reasons
for the recall and whether there
would be a long-term impact.Those
conversations gave us conviction that it
would not be a long-term issue and we
were able to quickly build a position at an
attractive price.
Your researchers recentlyhada
trip toChina.What areyour views
on its growthprospects?
CC:
The country is in transition; its recent
growth has been driven by property and
construction spending, but the Chinese
government wants the consumer to
drive future growth and that shift has not
yet materialised.The anti-corruption
campaign is reining in spending on luxury
goods, but it is also having unanticipated
effects.Companies are so fearful of
government action that they are cutting
back on all sorts of incentive spending
– even giving corporate gift cards.The
effects of these cuts are being seen by
a range of companies, from food to
retail.Growth rates are expected to fall,
but company valuations are also declining
so we need to be more selective about
what we invest in.
What challengesdoes sluggish
growthpresent for investors?
GL:
In a slow-growth environment we
focus on finding companies that make
their own luck.We look for characteristics
that we label‘The 3Ps’: the industry
‘Pie’ is growing faster than GDP; the
company’s‘Piece’ of that pie is growing
– it is increasing its market share; it has
‘Pricing Power’. If we can find all three,
that is a pretty good formula for success,
irrespective of the economic environment.
The Chinese
government wants
the consumer to drive
future growth
Getty Images
