Worldwide Leaders

Its business model is fundamentally local in nature and generates lots of cash through resilient, recurring sales. The management team is focused on growth by increasing the density of its route network, and so driving improvements in profitability and earnings.

During the quarter we sold completely out of four companies as we grew concerned about their ability to grow their end customer markets. These include: Midea (China: Consumer Discretionary) which makes home appliances for the Chinese market; Infineon Technologies (Germany: Information Technology) which makes semiconductors for electric vehicle and renewable energy markets; Hamamatsu Photonics (Japan: Information Technology) which makes equipment to generate, detect and filter light for scanners, x-ray machines and automation devices such as barcode readers; and Graco (United States: Industrials) which specialises in paint sprayers and products that manage corrosive and other difficult-to-handle fluids.

We are always looking at new companies and recently visited Sweden to meet with some new and some old businesses, including Atlas Copco (Sweden: Industrials), the world's leading manufacturer of air compressors, which is held in the strategy. The opportunity to meet with company management on their ‘home turf’ is invaluable; it is much easier to get a sense of how culture and people have shaped a company and its future return profile when sitting within their offices; or, in the case of Atlas Copco, 20 metres below their office in a test mine. We continue to find excellent investment ideas by focussing on the impact that outstanding people can have on businesses with strong franchises and resilient financials.

For Lincoln Electric (United States: Industrials), getting out the Russian market was an easy decision, the only question was how. They stopped production in April 2022 and have focused on supporting their former employees as they look for options to divest their facility. Meeting with companies in person helps us to understand the quality of management through the decisions that they take.

We recently visited the United States to meet with a wide range of industrial and consumer companies across Chicago, Cincinnati, Columbus, Cleveland, Boston and New York. In total we met with 50 companies, many of them leaders in their industries. We highlight some of the companies we met with in more detail here along with the reasons why we believe they fit so well with our investment approach. The trip was a great reminder of the number of excellent companies out there with competent and ethical stewards that generate returns by focusing on building long-term franchises in profitable niches.

During the quarter we added a new position in Ashtead Group (United Kingdom: Industrials), an industrial and construction equipment rental company with a long-tenured leadership team. Despite being founded in the UK in 1947, Ashtead Group currently derives more than 80% of its revenues from the United States due to its acquisition of Sunbelt in the 1990s². Renting equipment reduces the need for companies to own equipment that sits idle leading to improved resource efficiency and reduced environmental impact. It also provides for a franchise that generates high returns and opportunities for strong growth prospects given the current fragmented nature of the equipment rental market. We continued to add to our position in TSMC (Taiwan: Information Technology) reflecting our conviction in the long-term potential of its business. We also added to positions in MonotaRO (Japan: Industrials), Fortinet (United States: Information Technology) and Old Dominion Freight Line (United States: Industrials).

We divested completely from two companies, Samsung C&T (South Korea: Industrials) and EPAM Systems (United States: Information Technology), preferring to consolidate exposure in higher conviction ideas. We also trimmed exposure to Mahindra & Mahindra (India: Industrials), and Infineon Technologies (Germany: Information Technology).

We also entered a new position in Japanese diagnostics company Sysmex (Japan: Health Care). Sysmex play a key role in the early detection and prevention of diseases and are also driving accuracy, affordability and efficiency in surgery through investments in surgical robots.

Other new positions include Samsung C&T (South Korea: Industrials) and Techtronic Industries (Taiwan: Industrials) as we took advantage of attractive valuations to buy companies well set up to grow over the next decade. We also took the opportunity to add to several industrial companies that we already own at reasonable valuations including Lincoln Electric (United States: Industrials), Linde (United States: Industrials) and MonotaRO (Japan: Industrials).

These changes were funded by exiting companies where we have lost conviction in their opportunities for future growth. These include two Japanese companies, Unicharm (Japan: Consumer Staples) and Shimano (Japan: Industrials). They also include two developing market banks in Kotak Mahindra Bank (India: Financials) and OCBC Bank (Singapore: Financials). While these remain good companies, the increasingly competitive environment that they are facing and the opportunities to find growth elsewhere led us to divest.

Lastly, we divested from CSL (Australia: Health Care) as the stock had become fully valued and a range of more attractive opportunities were available. We also reduced our position in Costco (United States: Consumer Staples) due to concerns about valuations.

Our focus, as always, is to look for high-quality management teams, running businesses that drive human development forward. Buying companies with strong balance sheets that can weather any coming storm, that have structural tailwinds driving their growth and reasonable valuations is the best way to invest our clients’ savings, and we have found many interesting investment opportunities.

We added five new companies to the strategy during the quarter. Lincoln Electric (United States: Industrials) is the world’s leading maker of welding equipment and is a high-quality franchise that is well positioned to benefit from the tailwinds of increasing automation, safety and transition to greener infrastructure. Linde (United States: Materials) is the world’s leading industrial gases company and a high-quality franchise with strong sustainability tailwinds that should drive growth for years to come. Samsung Electronics (South Korea: Information Technology) operates in consumer electronics, information technology and communications worldwide. We took the opportunity of attractive valuations to invest in a company that is well positioned to contribute technology solutions to most global development challenges. EPAM Systems (United States: Information Technology) is a digital platform engineering and software development services company. We have been interested in the company for a while and took advantage of attractive valuations to initiate a position. Midea (China: Consumer Discretionary) is a home appliances manufacturer with strong cash flows and an exciting direction of travel into innovative technologies.

We funded these new positions by divesting three stocks completely.  We have been monitoring Philips (Netherlands: Health Care) since a safety recall of ventilators in 2021 and this quarter lost conviction that management could sufficiently improve the quality of the culture and franchise.  We also sold our position in Constellation Software (Canada: Information Technology) which has been an excellent investment over the past few years but had become very expensive.  While we retain conviction in its management and business model, its valuation left no room for error and we feel there are better opportunities elsewhere.  Finally, we sold Nestlé (Switzerland: Consumer Staples) as it is struggling to grow the business at the same time as it is increasing its levels of debt.  In addition, we trimmed positions in CSL (Australia: Health Care) and Tata Consulting Services (India: Information Technology) as they had become fully valued.