RIO vs Amcor and our five-point investment mantra

Hugh Giddy

Investors Mutual Limited

There are five key things we look for in companies that we seek to buy and own. But to be honest, it's actually quite hard to find all those things together. Our five-point investment mantra includes:

  1. Competitive advantage,
  2. Recurring earnings,
  3. Run by capable management,
  4. That can grow,
  5. At a reasonable price.

In this wire, we compare Rio Tinto with Amcor to show how our focus on recurring earnings drives our preference for industrials over resources.

Rio: Volatile earnings profile

The first chart really just shows you the correlation between Rio and the Iron Ore price. Rio Tinto have other operations like diamonds and copper, but it's mostly iron ore.


The main input to their profits is the iron ore price. But they don't determine it. They can't say to their customers, "Okay, we're going to charge you $100 for iron ore." The market says iron ore is $70 and that's what they get. So the price they receive is beyond their control. All they can focus on is minimising their costs which, to be honest, they've done quite well. As the next chart shows, the earnings have been very volatile. They've gone up and down over the last 10 years.

So RIO is a good resource company that is well managed, they've got good assets including the Pilbara, but they don't actually control their revenues. That's determined by supply-demand in China and around the world for steel and other end products. Increasingly the price is also driven by financial speculation; there are a lot of futures contracts on iron ore and steel. Apparently, the average holding time for an iron ore or steel contract is less than three hours. So there are real long-term investors playing in those futures markets!


Amcor: Steady earnings


Amcor, in contrast, is a classic industrial stock. It's now essentially an overseas exposure. Most of the operations are in the U.S. and Europe, as well as Asia Pacific and South America, providing a mix of rigid and flexible packaging used essentially for consumer goods.

This includes things like a bottle of Gatorade, or a box for packing cans in, or packaging for shampoo. The demand for the products is very steady. They are able to increase the volume slightly and get some price growth over time so revenue growth will be in the single digits, but there will be growth pretty much each year.

It offers steady growth with some amount of pricing power because they are a global leader, the customers need them, they need their customers. 


You can see it in the EPS chart above. It has increased earnings pretty steadily and because of that the dividend can also increase quite steadily. So it's a much smoother ride and we've always tried to focus more on providing a smoother ride to our investors.

We like to invest in what we think are more defensive, lower risk, lower downside risk companies like Amcor. Over time, you've made some good money out of Amcor because of that steadiness of growth, and the steady yield.


There are two types of forecasters. Those who don't know; and those who don't know that they don't know! I don't know if the market's going to fall or rise and most people are the same.

However, you can pick a good company with recurring earnings, and that also has a competitive advantage, can grow and is run by capable management, and trading at a reasonable price. That's what you can do more easily and that's what we aim to do at IML.

20 lessons from 20 years of quality and value investing

This year marks IML's 20th year anniversary of managing investors' funds in line with our value and quality philosophy. To mark this occasion the IML investment team have compiled 20 'lessons' from our 20 years of quality and value investing at IML.

Access the insights here 

Hugh Giddy
Senior Portfolio Manager & Head of Research
Investors Mutual Limited

Hugh is co-manager of the Investors Mutual Australian Share Fund and is Portfolio Manager of the Investors Mutual Concentrated Australian Share Fund. He is also the Head of Research for IML. Hugh has extensive investment experience in equities,...

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