We believe that innovation comes from enterprise, that is, innovation drives wealth creation which is eventually reflected in share prices. On the other hand, all you get from debt is an interest rate. This is why equities outperform debt over the longer term.
We also believe that unless a company is able to earn a sustainable return on invested capital (ROIC) above its cost of capital (COC), it will soon disappear or be taken over. Sustainably high ROIC’s derive from good management of good business models; typically, companies with sustainably high ROIC’s have strong barriers to entry and hence pricing power – often derived from brands, distribution channels, networking effects etc. We also look for a wide enough return above the COC to ensure sufficient cash flow to pay maintenance capex (to maintain the franchise) and to pay dividends.
In turn, this means that we dislike companies which are cyclical, where cash flow is highly variable and often negative after maintenance capex.
Our beliefs also apply to banks; quality management attracts quality customers which is a strong barrier to entry against poorly managed banks – especially in Zimbabwe where the law of contract or the ability to foreclose is weak.
Occasionally, clients will see investments where the ROIC is well below the COC; these tend to be companies where restructuring or unbundling is expected to transform prospects such that the ROIC returns to above the COC sustainably once more.
We regard risk as the permanent loss of capital rather than volatility. We try to mitigate this by buying cheaply and selling when the price exceeds our estimate of a company’s valuation.
Because we search for good business models – which tend to be more stable than cyclical companies or companies with poor business models – we will tend to underperform in a raging bull market when a rising tide lifts all boats. Conversely, we should do better when markets fall. The (general) exception to this would be when foreigners are dominant players since they too will tend to focus on good business models.
Our portfolios are structured as follows:
| · | Portion Held in largest 5 securities: | 55% |
| · | Portion Held in largest 10 securities: | 77% |
| · | Portion Held in largest 15 securities: | 90% |
