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The importance of stewardship when selecting companies
We believe the quality of people behind a business has the greatest bearing on its long-term success or failure. Read examples of our portfolio holdings across a range of ownership models, all with exceptional cultures, and also where we've made mistakes.
Summary:
- We believe the quality of people behind a business has the greatest bearing on its long-term success or failure.
- We have found through time that one of the surest ways to lose client money, is by handing it to people who do not have as their prime focus, the long-term performance of their company and minority shareholders who are along for the ride.
This article gives examples of:
- Portfolio holdings across a range of ownership models, all with exceptional cultures
- What makes us change our minds on stewardship and
- Where we’ve made mistakes
It is often said that investing is simple, but not easy. We believe that too few investment managers have the scope, the inclination, the culture, or a structure that enables them to take a view longer than the next twelve months when making investment decisions. But in a world which is increasingly short-term focussed, one of the most enduring competitive advantages a company can have is a long-term business builder at the top.
People who act as long-term owners in their capital decisions and risk taking are all too rare in global equity markets. We often find them as first-generation entrepreneurs, families, foundations or organisations with exceptional cultures. Research suggests family backed companies create value1. In a world of corporate blow-ups, short term management enrichment, and mistreatment of minority shareholders, it’s important to know who you are handing your money to.
We believe the quality of people behind a business has the greatest bearing on its long-term success or failure. When we assess the quality of people at a company we ask simple questions, of the sort you might ask when entering a long-term business relationship with someone: do they share our time horizon and view of risk; are they competent; how are they incentivised; do they have a track record of treating all stakeholders fairly? We learn a lot by examining financial history, having conversations with people, and doing third-party reference checks. What we learn helps us gain and build conviction in people and cultures.
What we look for
We have often backed individuals who have founded companies, or who continue to steward a company under a family name. One of the largest holdings in our Worldwide strategies is US based cybersecurity company Fortinet. Fortinet was founded and is still run today by two brothers, Ken and Michael Xie. They have a long history of building successful cyber security businesses based on their engineering education and training.
Our observation is that the Xie brothers have built Fortinet from a set of simple principles, grounded in winning business by driving product expansion through technical merit, while the industry chases the short-term gain of acquisition. It’s an approach that has enabled them to offer a single platform approach to cyber security. This provides customers with the simplicity that many others can’t achieve as they are held back by the legacy of purchased technology and the complexity that comes along with it. By developing their own hardware and investing over $1bn during a 17-year period in chip power development, they have produced a chip that delivers better performance at a better cost base2. The impact of this is twofold, in that other companies struggle to compete with Fortinet pricing, and their customers with lower budgets can still access best of breed solutions, expanding the market opportunity for the company. We think it is no coincidence that the share price of Fortinet has returned on average 32% per year over the 10 years to the end of January 2025 and is one of the largest positive contributors to the Worldwide strategy performance over almost every period.3
A company that we hold in both our Worldwide and Global Emerging Markets strategies is Brazilian-based WEG. WEG started life as an electric motor company in 1961, founded by the three people whose initials became its name: Werner Ricardo Voight, Eggon Joao de Silva and Geraldo Werninghaus. Over the last 65 years, it has grown into a company that produces electrical products for end markets. These range from industrial automation, power generation and distribution, and large electric vehicles. While it is no longer run by the families of the founders, they remain majority shareholders. This enables them to take decisions in the long-term interest of the company, including appointing long-tenured management teams. Their new CEO, Alberto Yoshikazu Kuba, is only the fourth in WEG’s history and he joined the business in 2002 aged 24.
A key decision made early on in WEG’s history was to remain vertically integrated. They make every element of every product themselves and even source packaging materials from their own forest. This is in sharp contrast to the drive for efficiency through outsourcing that has been business orthodoxy over past decades. At times it has slowed their rate of capacity expansion. But it has provided them with a critical advantage: they can take market share when competitors are paralysed by supply chain snarls. For example, they have been able to supply transformers to electricity-hungry data centres even as competitors face 4-year delays in building additional capacity. And this has translated into stock market returns of 15% per year over the past 10 years, beating the global index returns of 10% per year over the same period.4
We also find many examples of strong stewardship in Asia, one of these being Japanese company, Hoya, held across our Worldwide, Asia Pacific and Global Emerging Markets portfolios. Eiichiro Ikeda has been the CEO since 2022. He has worked at the company for 30 years, bridging the transition from a family-owned company to professional management. Hoya is a leading producer of precision glass products which range from optical lenses for spectacles through to the equipment needed in the manufacture of semiconductors and computer hard drives. Hoya was founded in 1941 by two brothers and over the past 80 years has evolved into its current form through a dogged focus on consistent delivery in high value, niche areas. Appointing an internal long-tenured employee to CEO allows that forward-looking culture of ownership to persist as they continue to seek out areas where they have a competitive advantage, leading to the generation of strong cash flows and returns.
What we avoid
Conversely, we have sold investments when the people we backed left, or made decisions that we believed were not in the best interests of shareholders. Our initial decision to invest in a world-leading healthcare company was driven by a CEO who simplified a complex conglomerate into a focused healthcare business. However, our confidence in the company was challenged when the management of the business responded inadequately to quality issues in one of their products. The way people respond to a crisis provides insights into the quality of stewardship. In this case, we felt that the short-term needs of shareholders were prioritised over the long-term health of the business. We sold our shares in the company after engaging with management on these concerns. We continue to monitor progress, as there have been some recent changes in stewardship with new management and the arrival of a significant shareholder.
And of course, there are countless investments which we do not make because we do not believe the management is of sufficient quality. This often happens with companies that could be considered high-quality businesses in most other respects and are often found in sustainable and ESG funds. For example, Bloomberg estimates that around 770 ESG funds worldwide were holding shares of a green energy company when its chairman was accused by US prosecutors of suspected bribery.5
We don’t always get it right
Like any investment decision, there are times when we get our judgement of people wrong. For example, following an impressive decade-long turnaround in a Dutch medical equipment manufacturer, in 2021 we mistakenly backed company management to manage a product recall. But a slow response by management led to greater regulatory scrutiny and lack of confidence in the company, hampering future growth. We also supported management at a US life sciences company to complete the acquisition of a former subsidiary in 2020. But they misread the regulatory environment which led to a hefty fine and several years of legal battles before divesting the subsidiary again.
Like any qualitative judgement, assessing the quality of the people in charge of companies is more of an art than a science. We have made some mistakes and continue to challenge ourselves in order to learn from them. We have found through time that one of the surest ways to lose client money, is by handing it to people who do not have as their prime focus, the long-term performance of their company and minority shareholders who are along for the ride. Since 1988, we have had an investment approach that is focused on finding and investing in high quality companies. This has given us a wealth of research about companies and families, including the way that they behave throughout economic cycles and how they adapt during difficult times. Over the past decades we have been fortunate enough to invest alongside some great business builders where incentives, decisions and timeframes have led to fantastic growth over the long term.
Clare Wood
Portfolio Specialist
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