An investment theme for the next 5 years and the stock to play it
Just because the macro environment is changing quickly, that doesn’t mean you have to turn your portfolio over regularly. Not if you have a long-term outlook.
That’s the mentality of Stephen Arnold, Managing Director and CIO at Aoris Investment Management. He doesn’t get bogged down making predictions about things outside of his control; inflation and what central banks will do with interest rates, for example.
Instead, he focuses on what he can control, and that’s identifying all weather businesses that will hold up through the cycle and will deliver superior long-term returns.
In this wire, I asked Arnold what his number one investment theme is for the next five years and for one stock plugged into that theme.
Note: This interview took place Wednesday 31 August, 2022. To get Stephen's full insights, you can watch the video or read an edited transcript below.
What changes have you made to the portfolio recently?
Stephen Arnold: The macro environment is changing and feels challenging, but we own 15 businesses that we consider all-weather businesses and that we believe will be well suited, however the next year or two pans out. But there's a business that we've repurchased for the portfolio early this year that I think speaks to those qualities of being all-weather. And that's a UK listed global business called Halma (LON:HLMA). And what Halma does is provide very specialised, discrete solutions to three main markets; environmental, safety and healthcare. My favourite example of illustrating what Halma does is next time you walk into an elevator, you might notice the doors don't close on you. Why is that? Well, Halma provides the little sensors in the door that detect that there's someone walking and stop the doors closing. So that's one of a myriad, very specialised solutions that Halma provides, but it's a business that doesn't get buffeted around by the vicissitudes of the economy.
It's a very, very resilient business.
And the best way I can demonstrate that is that Halma has increased its dividend by more than 5%, for 43 consecutive years. Isn't that remarkable?
So Halma is a great example of a business like the other 14 in our portfolio that we believe has those all-weather characteristics and is well suited to an environment that as is say, has got inflation and a lot of uncertainties about it.
How do inflation and recession risk play into your strategy?
We recognise that the world is uncertain and we recognise that there are challenges, but we don't have a particular view on inflation or recession.
What we do have a view on is the 15 businesses that we own and that we believe are time tested. We can look back over decades of history and demonstrate how they've performed, how resilient that they've proven to be, that the low levels of debt provide a resilient capital structure should things prove to be more difficult.
And we've also observed that over time, they've been able to grow and take market share when things do get tough. And so we believe that these sorts of businesses are for us, the right sort of businesses in today's uncertain environment, and whether things turn out to be a bit better or less good than the headline would suggest. And we believe this portfolio of all-weather businesses is well suited for today and will be able to achieve our objectives over the next five to seven years.
What is the #1 investment theme for the next 5 years?
The number one theme that we believe in is quality.
We believe high-quality, durable, resilient, competitively winning, consistently profitable businesses are the best place that you can have portfolio capital over the next five to seven years, to both protect wealth and create and compound wealth.
And here's one stock that I think really embodies those characteristics, which is Cintas (NASDAQ: CTAS). Cintas is America's largest uniform rental company. So that means if you're an employer, your organisation employs people that wear uniforms, it might be hospitality, a restaurant, a hotel, it might be an airline, it might be a manufacturing site. Rather than the people wearing those uniforms, taking them home, sticking them in with the kids’ school clothes, they can leave them at work and Cintas, for $1.50 per person, per day will launder them, replace them and repair them as needed. And so those people wearing uniforms look fantastic today and tomorrow. And that's a compelling proposition. It's a compelling proposition when customers are looking to make their business simpler, to make their business more efficient. And while Cintas is there, there are other things that it can do for you. Whether it's making sure that the first aid kit in the kitchen is fully stocked because the health authorities require that it is, filling up the restroom supplies in the restroom. So it's a very resonant, resilient growing business. And there are vast, vast numbers of organisations that today don't use that service and Cintas is winning that business every day. It has grown. It's twice as large as its nearest competitor. It grows twice as fast as nearest competitor and it's twice as profitable.
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