Recently the name of my strategy changed from Oppenheimer Global Value to Oppenheimer Global Focus Equity UCITS. Global Focus is a better reflection of what I believe is the “right way to invest.” I’ll be the first to say that I’m still running the fund the same way that you’ve come to expect. Nothing has changed there, but it would be a failure on my part if I hadn’t learned anything along the way and gotten better. With that in mind, here are the things about the strategy that have evolved since inception.
One thing that I’m sure is clear to my most tenured shareholders is the decrease in fund holdings – the strategy is more concentrated than when I started. I’ve done hundreds of meetings with clients over the years, and from those it became obvious to me that the average customer is significantly over-diversified. They just own too many things to outperform. I did not want to contribute to that. Couple that with learning over the years how to construct a portfolio to balance risk and reward, and additional concentration in the fund is a natural outcome.
The other change is a focus on what I call compounding returns vs trading returns. When you hear most people talk about a stock or the “market,” they talk about it having this much upside or that much, the implication being that you buy it, get that upside, and then sell it. Great businesses, though, are like machines that produce a return by earning more than their cost of capital. When the advantage that they have is durable, they can earn more than their cost of capital over many, many years. That’s the compounding effect that everyone is looking for, and it’s generally far more valuable than the trading returns that most people are focused on. Shouldn’t compounding returns be considered in valuation as well? Absolutely. Fortunately for us, the same three questions we’ve always asked do just that.
Compounders also have a certain profile that you learn to recognize. One thing that they have in common is the importance of cash. Stable cash flow growth and cash oriented valuation metrics play a significant role in both the consideration of business quality and valuation. After 20 years of investing experience, we have found no better representation of business reality than cash – it is the most difficult thing to manipulate and less subject to the influence of human hands. A "compounder" is a business that can compound cash flow at an above-average rate over many years. We have a simple set of things we look at that give us insight into the compounding ability of a business.
Is the business exposed to a sustainable growth theme? The world is always changing. Some parts of the economy are greatly favored and can enjoy decades of opportunity. Others face structural headwinds and may be disadvantaged for decades or outright destroyed by change. We look for investments in those areas that are favored and avoid those that are swimming upstream. The tailwinds provided by structural, sustainable growth solve a lot of problems for companies.
What is the company's advantage and is it durable? Great investing requires you to understand the nature of advantage. Advantages come in many different shapes and sizes. We spend much of our time identifying advantages, and the source of that advantage, to evaluate how durable a company’s position will be. Advantages in the hands of the right management team translate into consistent revenue growth over long periods. That’s a key ingredient in compounding. We spend a lot of time as a team and with companies discussing the nature of advantage. Having done this for many years, we know what advantage looks like and what makes it durable.
Do the economics of the business improve with growth? We love companies that get better as they get bigger – where margins go up not down. This quality isn’t required for a business to be good, but it can certainly make a great business even more attractive. Balance sheets matter, too. Strong balance sheets allow management to take advantage of opportunities that weak balance sheets cannot. Bear markets and financial crises create opportunities for great businesses.
Part and parcel to the evolution of owning more "compounders" is the willingness to, as Warren Buffet put it best, “pay a fair price for a great business”. It can sometimes look like you’ve paid a premium to the market or a sector, but in our experience, a fair price today may still be a substantial discount to tomorrow’s true long-term value. The discipline around buying something for meaningfully less than what it’s worth remains our north star. It is what investing is all about.
In summary, perhaps the most important attribute of a successful portfolio manager is learning throughout one’s career. The world is very dynamic. Many of the best companies and leading technologies when my career began are long gone – either bankrupt or competed away to irrelevancy. It never stops. If you stop learning, the same will happen to you as a PM.
The Oppenheimer Global Focus Equity UCITS is guided by the same investment philosophy I started with when I began managing investment portfolios, plus a couple of things I’ve learned along the way. If you’d like an update on what we’re doing for you, give your OppenheimerFunds representative a call. We’re happy to help.
Investments are subject to market risk and volatility. Cross border investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Value investing involves the risk that undervalued securities may not appreciate as anticipated. Mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a mid-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss.