For many market participants (and certainly this one) the Summer heralds the arrival of hotly anticipated sporting events, which are set to provide a welcome break from the hype around AI, and the ongoing inflation and interest rate conundrum. There is no shortage of action in the UK, with Wimbledon and a captivating Ashes series both well under way. But for our continental cousins, the most eagerly awaited event will have been the ‘grand départ’ of the Tour de France. The iconic peloton started its month-long journey this year in Bilbao, in the shadow of the famous Museu Guggenheim, and is now wending its way through the French heartlands of the Massif Central, before beginning the first of many epic climbs through the Alps.
None of us are foolish enough to compare the extraordinary strain and potential sporting immortality of these mad cyclists, to the day-to-day grind of what we face analysing and investing in Quality Growth companies. However, there are some striking similarities between what we do at Seilern and some of the features of the tour, which may help to shine a ‘lanterne rouge’ on some of our differentiating characteristics.
Perhaps the most notable aspect of the tour is its length. Unlike most sporting events, which take place over a couple of hours, or maybe a few days, the Tour takes place over a month and comprises 21 days of gruelling pedalling. Furthermore, each day itself is long, covering on average 170km and lasting five to six hours. That’s the equivalent of cycling the Olympic road race, every day for 21 days. It is so arduous that many do not finish, with 23 per cent of the 176 cyclists abandoning the race last year. Each team therefore needs to develop a strategy and tactics with this long-term view in mind.
We take a similar approach to investing. But whereas most fund managers see a year as being long term, we try to find companies that we can hold for more than a decade, and our average holding period in Seilern World Growth of seven years, reflects this.
The second defining characteristic of the Tour is teamwork. While ultimate glory comes to the winner of the yellow jersey, that glory is in fact shared by each member of his team, each with different abilities, and responsibilities. In the same way, ours is a collaborative strategy, with each member of our investment team contributing in different ways to the overall success of our funds and the company. In fact, our eight-person research team is the same size as each team in the tour, with our Head of Research, Tassilo, the equivalent of the directeur sportif. This large team gives us the time and space to analyse our companies in depth, diminishes the effect of emotional biases and reduces key person risk. In addition, we are supported by our marketing, trading and operations teams, who provide the equivalent assistance to that of the fleets of support cars, repair teams, technicians, medics and planners, to the cyclists.
While the team is paramount, each team will have one cyclist who they deem capable of winning the overall event. Unlike some of the other riders who may be able to cycle in relative comfort within the peloton, and may not even complete the entire race, this cyclist is hoping to be near the front at the end of each stage, whether it is a sprint through the Pyrénées-Atlantiques, or a vertiginous climb up Mont-Blanc. The companies in the Seilern Universe are similar to these logic-defying cyclists. Companies like Mastercard, West Pharmaceutical Services and Idexx Laboratories have been able to generate impressive levels of earnings growth, consistently, year after year, well ahead of both industry and market peers. They have done so regardless of whether they faced economic booms, COVID busts and, now, a high inflationary environment. We are effectively looking to fill our Universe with these “yellow jersey” companies.
The final parallel that seems relevant comes from the point of view of our clients. Because, although we are looking for the company equivalents of Miguel Induráin, Eddy Mercx and Chris Froome, whose earnings remain consistently high over time, we do know that over shorter time periods, the stock prices of those companies can vary widely depending on the underlying environment, market liquidity and the sentiment of other investors. From our clients’ perspective, they may need to pick a team of assets that, in aggregate, provide consistent share price performance across rising rate environments, cyclical rallies and recession-driven market crashes. They should therefore see our funds as their Quality Growth block within their asset allocation strategy. Over shorter time periods they may view us as only being their ‘King of the Mountains’, not necessarily capable of leading the pack in certain market environments like strong cyclical rallies, and for that they might need to turn to a sprint specialist.
It is our belief however, that with a long enough time horizon, our funds should also be challenging for the yellow jersey, like our underlying companies. As we always say, the underlying principle behind what we do is simple: earnings drive share prices. We therefore try to find those companies that can generate, consistent, high levels of earnings growth, over multi-year periods and from sustainable sources. And then we hold them, for periods that might make even the Tour look like a short race.
1The lanterne rouge is a playful yet still coveted award given to the cyclist who holds last position in the race.
2The ‘King of the Mountains’ red polka dot jersey is awarded to the best climbing specialist, the rider who gains the most points for reaching mountain summits
THIS INFORMATION IS FOR PROFESSIONAL INVESTORS ONLY AND SHOULD NOT BE RELIED UPON BY RETAIL INVESTORS.
This communication is issued by Seilern Investment Management Ltd. (“SIM”), the investment manager and distributor for the Seilern International Funds PLC (“the Fund”) in United Kingdom (“UK”).
It is for information purposes only and does not constitute an offer or invitation to invest in any fund, security, or financial instrument, nor a recommendation of any investment strategy. Opinions expressed are those of SIM as of the date of this communication’s publication and are subject to change. No responsibility or liability shall be accepted for amending, correcting, or updating any information, opinions, and expectations contained herein.
The Fund is recognised in the UK by the Financial Conduct Authority (“FCA”) under the registration number 200143.
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