Jacob Mitchell, Chief Investment Officer at Antipodes Partners, says it's more than just the quality of the business that drives investor returns, it's also about the price you pay to invest. "Your returns from the investment, as opposed to your returns from the business, rely on the starting value." Mitchell says his team looks for leading businesses with characteristics such as steady profitability, good opportunities for growth, and high barriers to entry. To protect investor's capital, they look for opportunities with multiple ways of winning. "If we get a value opportunity, which is underwritten by the multiple ways that we can win, if we're wrong on something we're not exposed to a single point of failure." In the video and transcript below, he explains some of the qualities of a great investment, using Samsung as a case study.
What drives investment returns?
A lot of investors especially in this environment would say the quality of the business is what drives returns. That’s a label for saying you do better buying quality businesses that are capable of producing excess returns over the long term. We think there’s a missing element to that statement: yes, that’s what we’re all looking for, but it’s also your about returns from the investment, not just your returns from the business. That brings into the equation the starting multiple or starting valuation. We think both matter, but usually, you don’t get a chance to buy a great business unless there’s some sort of change that allows a gap to open up.
Samsung: A case study
It’s easy to look back and say what has been will be, but we prefer to analyse what’s happening today and say ‘well actually, there’s evidence here that Samsung’s adopting a pretty progressive payout ratio and buy back policy.’ Leading businesses like Samsung have got certain characteristics; very steady profitability, good opportunities for growth (because it’s a leader), barriers to entry, and a product cycle.
Multiple ways of winning
We put a big emphasis on what we call ‘Multiple ways of winning.’ The first way to win is to have a value approach; look for intrinsic value number one.
Number two how was that underwritten? What is going to close the gap? Typically it’s one of 4 things: product cycle; with Samsung you’ve got that in spades. For example, disruptive screen technology, a new and successful launch of the S7 handset. Often it’s outcomes relating to changes and competitive dynamics, such as cyclical industries where overcapacity is clearing, or a truly disruptive new business arrives. In the case of Samsung, it’s not a new business model, but the disruptive nature of super-thin AMOLED screens, where they’re a real leader. We’re going from a smartphone environment to a foldable device environment where the distinction between phones, tablets, and laptops will start to blur.
It can also be due to changes in the regulatory environment. Samsung doesn’t face regulatory issues, so it’s not so much a factor in the investment case.
Finally, management self-help, and we have that. Management at Samsung is adopting more progressive payout and buyback policies.
If we get a value opportunity that’s underwritten by multiple ways we can win – if we’re wrong on something we’re not exposed to a single point of failure – they will tend to be our biggest holdings.
Low-risk, high-return opportunities will always be at the top of our holdings list.
For more information visit the Antipodes Partners website: (VIEW LINK)
Transcript has been edited for clarity.