Quality Businesses for Normal and Extreme Times

Vinay Thapar: The world is very volatile right now. It’s very unpredictable. What we think investors should do is to focus on the fundamentals of businesses and to think long term, and that’s what we continue to do.

What really separates our Portfolio from others is this really keen focus on finding good businesses. We define it very specifically. We want capital-efficient businesses that are taking their profits and reinvesting them back into the business to keep that virtuous ecosystem going. It’s that combination that we think increases your odds of success and makes a great business durable over the long term.

Companies can grow a number of different ways. One of the ways is by buying back stock. That isn’t, in our view, a real way to create long-term value. What we want are businesses that are taking their profits and reinvesting in other opportunities that help them to remain efficient and continue to grow.

Over the long term, historically, three sectors have exhibited the best characteristics of what we’re looking for, and those are healthcare, consumer and technology. Some of the other sectors, like industrials, and energy, and financials, have interesting companies within them, but a lot of them require you to make predictions about things like interest rates or the price of oil or other commodities, which we’re just not going to do.

There is a lot of focus on how persistent inflation will be. We think that that’s a valid conversation for investors to have. What we would argue is that if you really just focus on businesses that have pricing power, that have a competitive advantage, high barriers to entry, that you can insulate yourself from those effects. Again, it comes down to the business rather than trying to predict what an actual inflation number will be this year or next year.

The other point I would make is that we’ve seen over the last two years, a number of companies that have done quite well in the market because of the pandemic and the resulting work-from-home benefits. But what remains to be seen about these businesses is whether they can be durable over the long term and the profits they generate, which is why we look for persistency in our portfolios.

We do think ESG issues are important for investors to take into account when they’re evaluating businesses. We have a dedicated ESG analyst on our team who digs into these issues—issues like the environmental impact of companies, the governance of these companies, the culture of these companies. The focus of the research is to really make sure that these businesses are aligned with our philosophy, but more importantly, to engage with them so we can share with these businesses best practices to help them be better.

What we want companies to do is to be able to deliver long term, durable profits, both in normal times and extreme times.