A defining characteristic of how we select stocks, how long we retain them, and how it may drive their superior success is the process of identifying Megatrends® and how they can impact a company's long term success.
A Megatrend® creates 'tailwinds' for a quality company and can extend their success. They are characterized by three things:
1. Disruptive. It must upset the status quo in an industry
2. Persistent. It must be proven to endure challenges to its survival
3. Long term. It must have a high likelihood of lasting at least ten years (a long 'runway')
We require both a quality company meeting our special criteria and at least one Megatrend® supporting it.
Megatrends®, may not support the kind of 'quality' companies we have identified or visa versa. For example the well known Megatrends® of disruptive public transport and short-stay accommodation offer little in the way of quality firms delivering the fiscal results we demand. Thus our investments are in companies that make profits, have high ROICs and respect shareholders. They don't burn cash and this excludes many.
Misunderstanding Creates Opportunity. When we unearthed the Demographic Megatrend®, we observed that the world tends to view and assume many out-dated things about people and their communities. Most of these views not supported by factual reality. Economists, governments, global organisations, academics, companies and fund managers often utilise wrong demographic assumptions that impact their thinking but herein lies the opportunity!
When we formulate a Megatrend® we study it objectively from as many sources and angles as we can. We seek to remove the risk of 'confirmation bias'. Thus we are curious, open-minded and invest a great deal of time reading, listening and observing.
Megatrends® Cluster Example
Demographics is often a headline touted by many with little real understanding of its longer term impact on investments and the companies that are impacted by them. Demographic understanding has produced 4 specific Megatrends®.
Africa's rise from extreme poverty is by no means over with a long-term large fast growing increasing disposable income population segment. A segment that's fixated on the consumption of beer and has a relatively very low product penetration today. Margins that beer producers make in Africa despite the corruption, conflicts and poor infrastructure are much larger than in developed nations and even than in China. Matched with our Quality overlay this resulted in Insync holding a position in Heineken.
2. Catch-Up Consumption
As South America, South Asia, Central Asia, North Asia and South East Asia develop massive "middle income' populations, they aspire to greater household conveniences and consumption. From washing powder to marmalade to washing machines; air conditioning, cars, clothing, bigger homes and the like. The list is monstrous. Interestingly religious and political factors have very little impact on purchasing trends or demand.
These regions markets can also be volatile and investing directly in them can be dangerous. We have observed that over time big global firms with local people on the ground and established for many decades in these regions are better at allocating and preserving capital that professional investors interpreting screens from a distant country.
Reckitt Benckiser owns brands such as Mortein, Vanish, Dettol and Durex to name but a few. Their growth is focused on those with growing income and aspirations in ever growing vast numbers.
3. Silver Economy
In developed nations the population is aging rapidly. The decades immediately after WWII saw a boom in family size that was then forever stifled as women gained equality, entered the workforce in large numbers and utilised modern birth control. Developed nations created its first generations that had not only spare income but also increased leisure time and life expectancy to enjoy it too. More nappies are produced for adults than for babies in developed nations as just one example of demographics. Reckitt Benckiser in the previous Megatrend® also shares in this one too. As we get older and medical technology rapidly develops, our life span and quality of life is extended. Medtronic is a prime beneficiary of this tailwind Megatrend®.
Travel is booming across the planet and the suppliers and services that feed off this long term trend will only get bigger as more and more nations (e.g. China and Indonesia) also mature. It is no fluke that a company that not only harnessed clever technology and strong management also enjoys this tail-wind. Bookings Ltd is better known as Bookings.com and Agoda.com.