The most exciting gift from volatility is opportunity
At Cooper Investors, we spend a long time thinking about the culture that drives human behaviour. As management consultant Peter Drucker put it, "Culture eats strategy for breakfast." Which is why we only invest in three types of governance structures. Firstly, family and founder linked companies, where the founders are still involved and they have skin and soul in the game. Secondly, owner-operator cultures. There are observable behaviours in management teams that tell you that those guys are running the business as if they own it. And thirdly, experienced change agents. These are typically underperforming companies where a new management team comes in, often at the inflexion point of the hubris to humility cycle and unleashes new energy.
2020 so far has clearly been a period of very high volatility driven by the global pandemic, an event that nobody saw coming but, as investors, we all had to deal with. Our first order of business was going through the portfolio, looking at the companies we owned, talking to the management teams and assessing which of these businesses would struggle for a period of potentially no revenue and no cash flows. We actually came away very comfortable with the vast majority of holdings, but in some cases, we did reduce exposure, say, to the travel industry, where we sold Booking Holdings and Getlink. We also sold some of our cyclical companies that had done really well in 2019, but were now facing a severely deteriorating outlook, such as Amatek and Amphenol. The most exciting gift from volatility is opportunity; we saw some great businesses on our watchlist sold down 40 or 50% in March.
Three new investment opportunities
We're really excited about some of the new investments we've made in 2020. We were able to leverage the due diligence that we've done on these businesses over many years, and the relationships we've built with management to make quick decisions. They typically fit in one of three clusters:
First, focused technology platforms. These are software businesses that have generally subscription revenues and net cash balance sheets. For example, Synopsys (NASDAQ: SNPS), which is one of the two major companies selling design software into the semiconductor industry. Their customers include companies like Samsung and Intel. We don't expect any slowdown in the demand for more power-efficient, faster, and more complex microchips. As the world continues to drive those trends towards cloud computing, the internet of things, and 5G, Synopsys, we think, can grow its top line at around 10% a year. The founder, Aart de Geus, is still involved as co-CEO and Chairman.
Second, iconic consumer brands. Many consumer companies sold off during the lockdown to levels that implied that their stores would never reopen and that their brands were permanently impaired. While this may be the case for some department stores, for brands that have been able to build a relationship directly with the consumer through social media and deliver to them through e-commerce, this isn't true. In fact, these guys are getting stronger. An example is Adidas (ETR: ADS). One of the world's longest running and most successful brands, with deep roots in sport and pop culture. Most people will tell you that Nike is the world's best run sports company, but Adidas has grown its top line compound 10% a year for the last 20 years with only one negative year. In truth, Adidas has been on a transformation journey since 2016, when new CEO, Kasper Rorsted, came in and refocused the business.
During March, the discount to Nike blew out, implying that this transformation had never happened. In reality, Adidas today is a radically better business than it was four years ago. And externally, the health and wellness trends are probably going to strengthen as a result of COVID-19 as more people focus and prioritise on fitness and playing more sport.
Third, stalwarts getting cheaper. Stalwart companies typically outperform market draw downs, but such was the ferocity of the sell off in March that we were able to buy some world-class businesses at compelling prices. Many of these businesses have an improved outlook. An example is Rentokil Initial (LON: RTO), the world's largest pest control and hygiene company. Now, pest control is a truly great business. The bulk of sales are on recurring auto-renewing service contracts, and it's a non-discretionary service. But don't forget about Initial, the hygiene business. This business can now go beyond just the washroom and is in a wonderful position to exploit new regulation around sanitation and disinfection that will be across all aspects of public life, from offices and transport hubs to schools and shopping malls.
Discover under the radar opportunities
At Cooper Investors we we build international equity portfolios that are available as both hedged and unhedged funds. We look for the best risk adjusted returns by applying our VoF investment process through a philosophy of ‘Observation Not Prediction’.
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Chris has been co-PM of the CI Global Equities Fund since November 2011, focussing on European and Japanese companies. He has travelled extensively, living in four countries and investing across multiple asset classes over his 15 year career.