An Enduring Investment Approach is Rooted in What’s True
4th Quarter, 2017
4th Quarter, 2017
Rick D. Moulton,
CFA, Portfolio Manager
At the heart of any sound investment strategy rests an investment philosophy. An investment philosophy, simply stated, is a set of guiding principles that govern all investment decisions made by an entity.
Most investment managers promote their own unique investment philosophies. The philosophies of value managers usually center on identifying undervalued stocks that will ultimately become appreciated by the market. Other philosophies may focus on a combination of risk and reward elements the portfolio manager believes will generate superior returns. Riverbridge believes many different philosophies can be deployed effectively. However, few philosophies have outlasted our time-tested, earnings power-based discipline.
Most of our loyal readers are familiar with the Riverbridge investment philosophy, which is rooted in the belief that earnings power determines the value of a franchise. We invest in high quality growth companies that demonstrate the ability to sustain strong secular earnings growth over long periods of time, regardless of overall economic conditions. For more than 30 years, this philosophy has been our guiding principle, enabling our portfolios to establish compelling risk-adjusted returns for multiple decades.
At Riverbridge, we believe what is true endures—in investments, people, and companies. Our investment philosophy remains as relevant today as it was the day we opened our doors in 1987. But, the genesis of our philosophy dates to the 1960s. Over this time, investors have witnessed many market environments, trends, and even manias. The 1970s featured an inflation-ravaged market that tested the patience of many investors. The euphoric dotcom market of the 1990s delivered investors outsized returns until its bubble popped at the beginning of the 2000s. The financial market crash of 2008 created challenges not seen since The Great Depression. Throughout these markets, the guiding principles of our investment philosophy have withstood these challenges.
Our investment team seeks well-managed businesses with diversified sources of earnings generating high returns on their invested capital. The management teams of Riverbridge portfolio companies have the fortitude to resist the short-term pressures of Wall Street. They refuse to prioritize near-term results when doing so would jeopardize the long-term health of the franchise.
Our portfolio companies tend to reinvest capital in themselves to build their earnings power. Regardless of the current market climate, the management teams of our portfolio companies are actively positioning themselves to thrive over the next decade as opposed to the next quarter. While our conservative growth style may cycle out-of-favor over short periods of time, the enduring disciplines of our philosophy have allowed our strategies to perform well on a risk/reward basis over entire market cycles.
The true test of an investment philosophy is whether it would survive in the private markets. Yet many philosophies instead seek to exploit a current public market inefficiency. In the 1990s, many styles were created to exploit what was commonly termed “The New Economy”. Once investors realized that—while displacements may occur—economics do not change, these philosophies soon vanished. More recently we have witnessed quantitative strategies deploying algorithms seeking to outperform markets on a quarterly basis. Interest rates, inflation, global growth are just a few of the many inputs that factor into their models. Once these inputs change, the algorithms that govern these philosophies are disrupted and require updates.
The Riverbridge philosophy is as valid when investing in private companies as it is when investing in public entities. We invest in companies possessing an enduring competitive advantage in their marketplace. Our portfolio companies are not dependent on borrowing and hold a dominant market position. Using time as their friend, these types of companies are rewarded for their advantaged capital. We are not attempting to exploit a transitory inefficiency in the public markets but rather making investments in sound companies benefitting from compounding, above-average unit growth for long periods of time.
The consistent application of a sound investment philosophy is the key for any investment manager seeking to deliver superior risk adjusted returns. While this concept may seem straight-forward, its deployment is not. The ability to resist near-term market emotions and not deviate from their stated investment philosophy is what separates enduring managers from those that come and go based on short-term market phenomena. While markets may be volatile and ever changing, Riverbridge clients can be assured that our investment philosophy will continue to be at the heart of our investment process.
1st Quarter, 2018
We focus on companies that are producing enduring unit growth while maintaining high returns on invested capital. Sustained unit growth combined with increasing returns on invested capital creates earning power.
2nd Quarter, 2018
While few dispute growth is a necessary ingredient for capital appreciation, an oft-neglected piece of analysis is the sustainability of such growth, which requires a deep look at a company’s strategic market position.