How We Assess Management to Identify Endurance
3rd Quarter, 2018
3rd Quarter, 2018
Rick D. Moulton,
CFA, Portfolio Manager
Loyal readers are by now well acquainted with Riverbridge’s unwavering commitment to our investment disciplines. We seek companies with a strategic market position in their competitive marketplace, consistent unit growth, and high returns on invested capital. All are of paramount importance. Our investment team also insists on investing in companies, regardless of the economic backdrop, possessing the ability to internally finance their growth so as not to be dependent on the credit and capital markets. Inarguably, however, the most important investment discipline we deploy is our assessment of company management. Endurance demands strong leadership.
Riverbridge, unlike most market participants today, seeks to invest in companies for multiple years, and some, even decades. In fact, across our portfolios we have invested with greater than 25% of our companies for more than ten years. Over this long time period, many variables change. Geopolitics shift. Interest rates and inflation ebb and flow. Investors celebrate bull markets and cope with bear markets. Too many management teams lose their way while attempting to navigate these events and the ever-changing landscape. Due to short-term performance pressures, management teams tend to prioritize execution and efficiency and often neglect their original reason for existence. This inattention to mission leads to a slow but consistent erosion of corporate culture. Strong management teams are needed to traverse these ever-changing conditions while executing their corporate missions.
For years, General Electric was a darling of Wall Street. This reputation was earned by their early and relentless focus on Six Sigma strategies to reduce manufacturing cost while improving profits. While this focus was successful at refining their production, General Electric ceased to be an innovator in its end markets. Today the company has surrendered its market leadership in many of the segments it serves.
On the other hand, Jeff Bezos, the founder and leader of Amazon, is constantly challenging his leaders to attempt new, innovative products and services while firmly understanding their founding mission is to deliver ever-increasing levels of service to customers. Amazon will disrupt themselves in their end markets long before a competitor will do so.
Riverbridge is separated from the pack by how we define quality management and qualify the leadership of our businesses. The truncation of the investor time horizon has caused the definition of “good management” to shift to near-term execution as opposed to long-term vision. Riverbridge strongly believes the adage culture eats strategy for breakfast. We invest in management teams focused on the next decade and beyond. Enduring investments require leadership to cultivate a culture encouraging and even demanding constant innovation—even if it comes at the expense of near term earnings. Expert management understands this sacrifice builds earnings power.
Riverbridge validates its assessment of management through our peer review process. Following extensive conversations and onsite visits with the management teams of prospective companies, our investment team conducts an exhaustive peer review. We meet with customers, suppliers, competitors, and other industry participants to gain their viewpoint of this management team. We seek to understand if differences exist between the way management views themselves compared to how they are perceived in their competitive marketplace. This discipline naturally leads us to management teams well respected in the eyes of their peers.
Fiserv, Inc. is a prime example of a company possessing a management team and a firm culture that allowed the company to thrive despite a massive transformation of the end markets they serve. Simply stated, Fiserv provides financial services technology to institutions such as banks and brokerage firms. These institutions witnessed dramatic progression of their marketplace requiring multiple disparate systems to communicate seamlessly. By never allowing themselves to lose sight of their founding mission to serve changing customers’ needs, Fiserv strengthened its market position and grew into a Fortune 500 company during a period of upheaval that has felled many competitors.
With market displacements becoming increasingly common throughout the global economy, strong leadership is of paramount importance. Barriers to entry in many industries have been lowered due to technological innovation. Companies possessing visionary leaders will be able to better navigate their ever-changing landscape. These leaders understand and carefully cultivate their cultural advantage to retain talent and to develop an enduring soft edge within their business. Riverbridge will continue to seek out companies with strong leadership possessing the ability to traverse the continuously changing environment.
4th Quarter, 2018
More than any other investment discipline we deploy, internally financed growth shapes our compelling downside protection in weak markets and contributes to the relative predictability of our investment returns.
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.