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Letter to Investors
Stewart Investors Worldwide Leaders Strategy
Thank you for your trust.
We try to do three things consistently
- Remain true to our investment philosophy at all times
- Foster a culture of excellence through a constant appraisal of our abilities
- Nurture a quality investment management business with an intergenerational stewardship mindset
These are key for us to deliver sound long-term returns. We strive to remain sober and frame our investment thinking over 10-year time frames. Paying a reasonable price for quality companies that profitably solve developmental challenges remains the bedrock of our investment approach.
What are we grappling with?
Edward Lorenz, a famous mathematician, put forward the Chaos Theory in 1961. The underlying premise is that small changes in initial conditions can lead to a wide variety of outcomes. His discovery explains the popularly understood butterfly effect. Now combine this with the law of unintended consequences. Then the idea that the more things change, the more they stay the same. We live in a world of constant news flow, technology arms race, strong man politicians, climate change and a shifting economic and geopolitical set up. Making strong predictions in this context is fashionable but risky. Hence, we grapple with questions that matter over our time frames and try and change our minds quickly where possible.
Covid is a distant memory but a good example of the butterfly effect. No living investor then had invested through a pandemic. We started speculating about how the world might change permanently and the implications for our companies. Thankfully common sense prevailed. We allocated more capital to quality companies at cheaper prices. The investment logic – if the best franchises and cultures cannot survive and evolve through a pandemic, who can? Moderna’s (covid vaccines) and Zoom’s (video conferencing tool) share prices are now back to where they were in March 2020.
“I will immediately…overhaul the trade system to protect American workers and families. Instead of taxing our citizens to enrich other countries, we will tax and tariff foreign countries to enrich our citizens.”
– Donald Trump1
The world’s economic set up is undergoing a seismic shift. How countries and companies respond to the changes being unleashed by tariff wars, technology arms race, and rising geopolitical risks will be interesting. History may hold some clues. Trump reminisces about the strength of the US in the late 1800s when tariffs were high and the US experienced “The Great Deflation” post the American Civil war. This period was marked by high growth, deflation and rise in productivity and real wages. Thanks mainly to the industrial revolution. This wasn’t a normal economic cycle. Then came the McKinley tariffs of 1890. McKinley’s primary aim was to protect a flourishing US economy from foreign competition. This resulted in a sudden spike in inflation and led to America’s first, albeit short lived, depression called the Panic of 1893. McKinley is popularly referred to as the “Napoleon of tariffs”.
But that was a different world. We are now in the 21st century. Different starting points, different actors and a different business and geopolitical reality.
The global economy today is a complex interconnected beast. Information and capital moves freely across borders. This has allowed American companies to build large global businesses in the last 4 decades. 8 of the top 10 and 24 of the top 30 companies by market capitalization globally are American businesses2.
| Index | Proxy | Share of U.S. Sales | Share of Foreign Sales |
|---|---|---|---|
| Russell 2000 | iShares Russell 2000 ETF | 77% | 23% |
| S&P 500 Equal-Weighted | -- | 69% | 31% |
| S&P 500 | -- | 59% | 41% |
US GDP is roughly one quarter of the world GDP3. Sizeable but the US has to do business with the remaining three quarters of the world’s GDP. The rest of the world is a larger market for American companies. On the other hand, the US still has amongst the lowest average tariffs globally4. A dealmaker would sense an opportunity here but overplaying your hand can cause trouble.
Global supply chains will go through a complex, expensive and time-consuming phase of adjustment to tariff barriers and rising restrictions on free movement of labour. Costs should rise for businesses and their first response will be to pass this on to consumers. America’s GDP is driven mainly by household consumption - roughly USD 18 trillion dollars of annual consumption value5. Many of these consumption goods are imported. The desire to localize manufacturing at a tariff neutral cost structure will take time. The more immediate impact should be sticky inflation6. Many countries, including the US, could be vulnerable.
The race to find Mackenna’s AI gold7
Meanwhile, Artificial Intelligence (AI) is fuelling a technology arms race between companies and countries. The current AI investment frenzy is reminiscent of the California Gold Rush. A little more than USD 200 bn was spent on AI related capex in 2024 and another USD 300 bn announced for 20258. This does not include the billions of dollars in VC money flowing into AI related start-ups. The large spenders are mostly the Magnificent 79 (Mag 7) companies. These companies spent much of the last two decades without competing with each other and with minimal capital investment. Their paths are now colliding in this pursuit of AI supremacy. The scale of investments suggests this is not just a race for AI dominance but potentially a race for their own survival. And they are all cashed up with little choice but to outspend each other. Interesting times ahead! The future looks more risky than the past for these magnificent businesses.
Early in 2025, President Trump announced a new USD 500 bn investment in the Stargate AI project. This was promptly followed by the launch of DeepSeek, a Chinese AI engine built at a fraction of the cost of its American peers. The capital rush and hype has even drawn in governments, muddying the cost structures of participating entities. The industry might have to go through a cycle of destruction and re-birth before clarity emerges. The cardinal rule of any industry flooded with excess capital.
AI has dominated headlines, and we are aware of the pitfalls of getting sucked into this news flow. Remember Blockchain? The usual Caveat Emptor10 applies - Tech czars regularly hype up their investments and ideas. Social media gives them convenient loudspeakers to amplify their views. Everyone is vying for the top spot in the tech genius sweepstakes. There is much self-interest and egos at work here. Investors should be careful to avoid becoming collateral damage.
“The way this works is we’re going to tell you, it’s totally hopeless to compete with us on training foundation models and you shouldn’t try.”
– Sam Altman, founder of Open AI to Indian tech CEOs and entrepreneurs in 2023.11
Is America entering its “golden age” or are we firmly in the modern “Tech Gilded age”? Just the front rows in Trump’s inauguration ceremony were worth roughly USD 1.4 trillion dollars12. Business and politics have always mixed with each other. Lots happened behind closed doors. But the open camaraderie between centibillionaires and politicians, and the world’s richest man being employed by the government while actively seeking to do business with the government is new territory for the current generation of investors. The accepted norms of conduct for lawmakers and corporates are changing rapidly in the US. Global leaders are possibly taking notes. In a different era or in a different country such events would be reasonable cause for alarm. But the investment world is firmly in the grip of American exceptionalism. More than three quarters of the MSCI World Equity Index is indexed to USD assets13 and within that, the concentration at the top, represented by many of those front row occupants, has never been higher.
Globalization, geopolitical stability and low inflation were the three musketeers that powered the world economy over the last few decades. The year 2022 possibly marked the peak for these conditions. Experiencing all these together again might be a distant reality. We are now in unchartered territory and choppy waters. The quality of companies we invest your capital in has to be sturdier than ever to navigate these conditions.
Reflections on strategy performance
The strategy returned 8.8% and 65.6% over 3 and 5 years, respectively, compared to the index returns of 18.9% and 65.3% over the same periods, on a gross basis in USD terms. In 2024, the performance of the strategy increased by 10.9%, compared to index returns of 18.0%. Performance is unsatisfactory in relative terms. Resource driven markets in 2022 and the consistent outperformance of Mag 7 companies, which we do not own, were key reasons. We struggle with the quality of the Mag 7 companies other than Microsoft.
| Discrete annual performance USD – composite performance % | 12 months to 31-Dec-20 | 12 months to 31-Dec-21 |
12 months to 31-Dec-22 |
12 months to 31-Dec-23 |
12 months to 31-Dec-24 |
|---|---|---|---|---|---|
| Stewart Investors Worldwide Leaders (Gross of fees) | 23.5% | 23.3% | -21.5% | 24.9% | 10.9% |
| Stewart Investors Worldwide Leaders (Net of fees) |
22.9% | 22.7% | -21.8% | 24.4% | 10.4% |
| MSCI AC World Index (Gross of fees) | 16.8% | 19.0% | -18.0% | 22.8% | 18.0% |
| Annualised performance over periods USD – composite performance % |
Since launch | 10 years | 5 years | 3 years | 1 year |
|---|---|---|---|---|---|
| Stewart Investors Worldwide Leaders (Gross of fees) |
9.0% | 9.7% | 10.6% | 2.9% | 10.9% |
| Stewart Investors Worldwide Leaders (Net of fees) |
8.5% | 9.2% | 10.1% | 2.4% | 10.4% |
| MSCI AC World Index (Gross of fees) |
9.5% | 9.8% | 10.6% | 5.9% | 18.0% |
Returns are typically driven by a handful of companies in any index, but the scale of concentration driving index returns has been unprecedented recently. For instance, the equal weighted MSCI AC World index has returned -3.8% over three years and 20% over five years on a gross basis. One can see the significant gap opening between the equal weighted index and world index in recent years. We would never equal weight our portfolio so this comparison is only for illustration purposes to highlight index concentration.
MSCI ACWI vs ACWI Equal Weighted (USD)
Cumulative returns since 31 Oct 2013
We spend a lot of time analysing our mistakes. Losing money is harder to deal with than making a bit less on the way up. A 50% loss requires a 100% gain to break even but a 25% loss only requires a 33% gain. Capital preservation is a close friend of long-term compounding. The math checks out.
Natura and Philips remain our biggest mistakes over a five-year period. We sold out of these companies in 2023. We discussed them in detail in our previous letter. The fund’s largest detractors in 2024 were Samsung Electronics and DHL Group. These companies hurt performance by 1.3% and 1.2% respectively.
Samsung performed poorly as the company lagged in the memory tech cycle. Management have accepted this mistake and seek to correct it quickly. Meanwhile, the company’s balance sheet and long-term prospects remain sound. Samsung is now trading below its book value, which is quite cheap for the quality of the franchise and the investments they are making. They can invest mainly because of strong cash flows and the USD 71bn cash pile14. The key risk to returns is the difficulty in cracking the code to high manufacturing yields in foundry.
DHL Group is in the midst of a downcycle in logistics. Management is using this period to invest countercyclically and to buy shares back at cheap valuations. This is possible thanks to strong cashflows even in downcycles. DHL commands a 40%+ market share in global express shipments15 allowing it to earn attractive returns on its asset base. The table below shows DHL‘s share of operating profits in 2007 v 2024. Over this time, they have sold their financial services division and significantly grown DHL Express. DHL is a much stronger business today than it was in 2007 But this is not reflected in valuations. Spinning off the postal business should release significant value. We expect this to happen in the coming years. Shifting supply chains should also favour DHL given its large global footprint. The key risk is a complete collapse in global trade.
| Share of operating profits of DHL | 2007 | 2024 |
|---|---|---|
| DHL Express | 19% | 88% |
| Post & Parcel | 53% | 12% |
| Post Bank (Financial Services) | 28% | 0% |
The strongest contributors to returns over one and five years to the funds were Mahindra & Mahindra (M&M), Fortinet, Arista Networks, Costco and Watsco. These businesses continue to be well positioned for growth in the coming years. Other than M&M, all these businesses delivered negative returns in the year 2022, which hurt performance. M&M delivered negative returns in the years 2018 and 2019. We remained significantly invested in these businesses during these down years. The short-term volatility in returns is less important to us than the questions of whether the quality of the business remains intact. Often, when quality remains sound, this is an opportunity for us to add to excellent businesses at cheaper valuations.
| USD returns | First purchased | 1-year return | 5-year return | 2022 return |
|---|---|---|---|---|
| Mahindra & Mahindra | 2017 | 69.3 | 371.7 | 34.1 |
| Fortinet | 2019 | 61.4 | 342.5 | -32.0 |
| Arista Networks | 2020 | 87.7 | 769.5 | -15.6 |
| Costco | 2019 | 38.8 | 211.7 | -19.6 |
| Watsco | 2020 | 10.6 | 163.1 | -20.3 |
What kept us busy last year?
We invested in 10 new companies and sold 13 companies. An unusually busy period. Our approach is to experiment with a longer list at the tail of the portfolio while showing conviction in the top 20 companies. We try to be ruthless with this tail where conviction levels don’t go up or when better opportunities become available. Our long-term approach is best demonstrated in the top 10 of the portfolio. The average age of our top 10 holdings in the portfolio is 6 years16.
Let’s dive into a couple of our new investments.
Brown & Brown (B&B) is the sixth largest insurance intermediary in the US17 stewarded by the Brown family and based in Daytona Beach, Florida. B&B facilitates the purchase and administration of insurance mainly for small businesses who depend on intermediaries such as B&B to help them with understanding and insuring against complex risks. B&B does not take any balance sheet risk and collects a fee for its service. The key ingredients in their recipe is trust with customers, an ownership mindset and a culture of empowerment. A good example of “Keep it simple silly!”.
Hyatt Brown, the founder of the business, ran B&B for 49 years before handing over to Powell Brown. Powell Brown has upheld the culture that Hyatt carefully built while cultivating a strong ownership and customer first mindset. 60% of B&B staff are shareholders in the company and the family owns 15%18.
“When we put the customer first, we know with great confidence that it will all work out for Brown & Brown in the long run.”
– J Powell Brown19
Companies with such enduring cultural attributes have a high chance of success as B&B has demonstrated in the decades gone by.
| Brown & Brown Growth Compound Annual Growth Rates/avg (Return On Equity) |
3 year | 5 year | 10 year | 20 year | 30 year |
|---|---|---|---|---|---|
| Sales | 17% | 16% | 12% | 11% | 13% |
| Net Profits | 22% | 20% | 15% | 11% | 17% |
| Operating Cash Flow | 12% | 12% | 10% | 10% | 14% |
| Free Cash Flow | 17% | 15% | 11% | 11% | 14% |
| Return On Equity | 15% | 14% | 13% | 13% | 18% |
Such consistency is rare. B&B’s free cash flow exceeds reported profits in most years. And B&B has reinvested these cash flows to grow organically and to consolidate the industry through acquisitions. Technology-driven disruption remains a key risk for them.
Sysmex is a world leading medical diagnostics company. We reinvested last year after selling in 2021 due to expensive valuations. The family has handed the keys to a professional CEO, Kaoru Asanu, who intends to sharpen focus on growth and returns. Sysmex has been investing in new technologies and in new markets over the last decade. These investments should begin to pay off. We believe there is room for profit margins to expand and for revenues to grow faster in the coming years. Sysmex has also begun to commercialise its surgical robots in Japan. Success in this area can take growth and profits to a much higher orbit while diversifying cashflows. We believe, this opportunity is not priced into its current valuations. Regulatory headwinds in China remains a key risk for the company.
“I also think it is important to remain humble and embrace a spirit of challenge. One of the biggest risks is of becoming arrogant or falling into the “large-company trap” and adopting a silo mentality”20
– Kaoru Asano, CEO of Sysmex.
The company’s culture is in safe hands.
It was a busy period for sales as well. Most of our sales were due to expensive valuations. We were unable to build conviction in Samsung C&T - a holding company with large investments in Samsung Electronics and Samsung Biologics. We expected the discount to these assets narrowing over time. But we struggled with this thesis post further meetings with management. We bought and sold this investment within a few months. Selling OCBC Bank was a mistake. The company continues to benefit from a stable banking environment in Southeast Asia rewarding patient shareholders.
So what does the future look like?
Quality businesses shine when the top-down macro becomes more challenging. We continue to find many such opportunities. This keeps us excited and motivated. We were busy travelling to Europe, Japan, China, India, Brazil, US and Turkey to meet with companies last year. Many markets outside of the US are beginning to look reasonably valued. Managing Emerging Markets and Asia strategies alongside our worldwide strategy gives us a ringside view of opportunities in these regions. Roughly half of the portfolio is invested in companies listed outside of America. This should prove helpful if American Exceptionalism hits a few roadblocks.
Predicting near term macro is not our forte. We did not foresee Covid or the conflicts in Ukraine and the Middle East. But such events teach us valuable lessons and we carry those with us. Sticking to what we learnt from Covid - companies with high quality cultures and sound franchises manage uncertainty, volatility and complexity better than most. Such companies are rare. Our endeavour remains to find such businesses, buy them at reasonable prices and remain patiently invested.
Thank you for reading and entrusting your savings with Stewart Investors.
Sashi Reddy
Feb 2025
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