Worldwide Leaders

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.

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).