Worldwide Leaders

Reflecting the continent’s strong culture of equity investment, it also boasts a disproportionately large share of companies raising capital through initial public offerings (IPOs)². Stewart Investors’ heritage of investing in Asian markets means we are well-equipped to tap into the opportunities this presents.

This quarter, we invested in Trip.com (China: Consumer Discretionary), a multinational travel agency that owns several platforms including MakeMyTrip and Skyscanner. Trip.com has survived a gruelling decade of intense competition in China, emerging as the country’s leading online travel agency, with a 60% market share³. We also believe it has an outstanding culture, putting its customers first while also taking care of more than 40,000 employees⁴. This should allow it to maintain its leadership in domestic tourism while expanding its footprint as a growing number of Chinese tourists venture overseas⁵. The economics of platform businesses such as this are compelling once they reach scale (providing that they operate in a stable industry environment). Trip.com is using the strength of its balance sheet to buy back its shares at what we view as attractive valuations, thereby enhancing returns to long-term investors.

The quarter’s second key addition was Chubb (United States: Financials). Founded in 1882, Chubb is a world-leading property and casualty insurer, operating in over 50 countries. It merged with Ace Insurance in 2016, combining two high-quality businesses to create an insurer with global scale and a substantial balance sheet. Sound underwriting depends on thousands of underwriters being prepared to say ‘no’ to poor-quality premiums today to protect their company’s profits many years into the future. This approach is at the core of Chubb’s business and, crucially, it was able to preserve this through the merger. Such cultures are rare and can only be built with patience. Chubb’s chief executive, Evan Greenberg, has consistently reiterated his company’s conservative approach to taking on new business and the company’s website states that “Chubb is an underwriting company and we strive to emphasize quality of underwriting rather than volume of business or market share”. Scaling up these types of cultures is difficult – but we think Chubb has succeeded. We believe this combination of culture with the size of its balance sheet and its global reach should help it to both preserve and grow capital at attractive rates over the coming decades.

This quarter witnessed a significant ‘first’ for this strategy – its first investment in a Chinese company. We approached our assessment of Alibaba (China: Consumer Discretionary) as we would with any company, by considering the quality of its people, its franchise and its financials. Alibaba is led by a highly capable management team that combines a private-sector mindset with strategic alignment with the goals of the Chinese government. It is reinvesting the generous cashflows that its mature retail business generates in building a new cloud business. It has net cash on its balance sheet and a share-buyback programme that is friendly to its minority shareholders. In our view, the combination of an attractive valuation with the potential for Alibaba’s technology to help China meet some of the development challenges it faces make the investment case here compelling.

We also added a new position in ABB (Switzerland: Industrials). This high-quality engineering business is a market leader in electrification, motion and automation. Its motors, drives and transformers are a small but critical part of its customers’ overall budget, and the depth of the relationships ABB has fostered with them puts it in a strong competitive position. We believe, the combination of increasing demand for electricity worldwide and the company’s focus on improving margins leaves ABB well placed to generate returns over the coming decade.

We continued to build positions in a number of recent additions to the portfolio such as Brown & Brown (United States: Financials), NVR (United States: Consumer Discretionary) and Carlisle Companies (United States: Industrials). Elsewhere, we responded to the attractive valuation of Samsung Electronics (South Korea: Information Technology) by adding to our position.

During the quarter we bought five new companies and the quote above is from a meeting with the company management of the first of them. Brown & Brown (United States: Financials) was founded in 1939 and is still stewarded by the Brown family. Over the past 85 years, the competent, ambitious and long-term management team has enabled it to grow beyond its Florida base to become the sixth largest insurance broker² in the United States. The company has also been expanding to Asia and Europe and given the fragmented nature of the insurance brokerage industry, there is plenty more room to grow in the decades ahead.

Carlisle Companies (United States: Industrials) make and sell construction materials, particularly the products needed to roof and waterproof buildings. Using high-quality products in houses leads to better ventilation and protection from weather as well as reducing energy usage and improving longevity. The high demand for new housing across America will provide strong long-term growth opportunities for this company as well as another new purchase, NVR (United States: Consumer Discretionary). Based in Virginia, NVR is the fourth largest homebuilder³ in the United States, focused on building high-quality homes for first-time owners. The long-tenured management team have a history of using industry slowdowns to expand their business in a controlled way, allowing them to benefit when housing demand increases.

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.