Final Picks and Perspectives: Wrapping Up the Quality-Growth Conference

Unveiling the last stock recommendations and my personal insights from London's top quality investing event

This is the final instalment of a series of reports from the Quality-Growth conference in London. This week, we continue with the last three stocks and some musings on competitive advantage and company culture.

Plenty of you have liked this idea and upgraded to a paid subscription – thank you! I have finally made my targets for paying subscribers and revenue that I set when Substack first paid me to write a weekly. It has taken 31 months, but I have been enjoying writing the column, so it hasn’t required much resolve. It’s a good lesson in perseverance, nevertheless. Hopefully, most of you will stay subscribers. To a number of top hedge fund managers, this Substack looks a bargain. Where else can you get such a large crop of ideas from top investors for $20?

I have had almost twice the revenue increase with the write-ups from this conference as I did from the value conference earlier in the year. That doesn’t mean that the value picks will do better, momentum is a major factor in markets. But I can assure you that the quality picks were not twice as good – what this tells me is that quality is fashionable and value is out of favour.

OK, you knew that, but 2x? Could quality compounders be over-loved? There has been a massive rerating since 2010 and interest is high…

Don’t miss next week’s Substack, for an exclusive chance to get a ticket to our first live event. It will be announced on social media on Wednesday, but will sell out quickly - honestly, it’s special.

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Training

Now is the time to buy one of our online courses. Our prices go up this month, by 20-25%, after being held for 3-5 years,

And just a reminder that on November 13, I am delivering my Forensic Analysis Course  to analysts in New York City. People are flying to New York to take this course, seriously! If you are in New York, you should not miss this opportunity to be come faster and more effective at processing a 10-K. We only have a few seats left.

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My Webinar on Accounting Red Flags

Please join me for this exclusive discussion on Revealing Hidden Earnings

I’m excited to be speaking at this webinar, where I’ll be digging into some of the tactics companies use to boost earnings. You won't want to miss this if you’re serious about understanding earnings management before it impacts the stock price. I’ll be sharing real-world examples and showcasing tools to cut through the noise and make smarter investment decisions. Join me, and let’s uncover what’s really going on behind the balance sheet.

Moneyweek Conference Offer

On Friday 8th November, you can join me at the MoneyWeek Wealth Summit in London, and get 20% off your tickets. As ever, I shall be writing this up (in full for premium subscribers).

There's a full agenda of speakers including keynotes from Alex Chartres of Ruffer on global risks, former podcast guest Barry Norris of Argonaut on the energy transition and MoneyWeek columnist Max King on investment trust bargains, plus panels on the UK stockmarket, emerging markets, growth opportunities in defence, tech, biotech and private equity, and gold and precious metals.

To buy a discounted ticket, go to the link below and add code BALANCE20 at the checkout. See you there!

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Quality-Growth Conference

The presenters at The Quality-Growth Conference 2024 were:

UK Managers

Nick Train, PM & Co-founder, Lindsell Train

Christopher Rossbach, Co-founder and Managing Partner and CIO, J Stern &Co

William Low, Global Equity PM, Nikko Asset Management

Kinal Desai, Co-PM Global EM Equities, GIB Asset Management

Stephen Yiu, Founder and CIO Blue Whale Capital

Stephanie Niven, co-PM Global Sustainable Equity, 91 Asset Management

James Anderson, Managing Partner, Lingotto Investment Management

US Managers

Rebecca Irwin, Global Equity PM, Jennison Associates

Andrew Brenton, Co-Founder and CEO Turtle Creek Asset Management

Angela Wu, Analyst, Artisan Partners

Alex Lee, Principal and PM Sustainable Growth Advisers

Europe/Hong Kong

Laure Negiar, Global Equity PM, Comgest

Ronald Chan, Founder and CIO Chartwell Capital

Is Corporate Culture Analysable?

A NinetyOne White Paper, “Culture as a driver of sustainable alpha”, attempts to codify a framework for evaluating company cultures. It cites research by Professor Alex Edmans at the London Business School which found that the top 100 firms in the ‘Great Places To Work’ survey had higher abnormal stock-market returns following their inclusion in the ranking.

The paper suggests that culture is a factor which drives business performance and the stock market is slow to recognise its value. Apparently, Edmans estimates that it takes the market four or five years to price employee satisfaction into share prices.

I had a quick look at this article by Edmans which I shall return to, but I find it staggering that this would take 5 years. Nor am I confident in his analysis which suggested these companies delivered stock returns that beat their peers by 2.3% to 3.8% pa over 28 years, and generated profits that exceeded analyst expectations.

I was also surprised why a distinguished academic would think that there was a link between company culture and beating street estimates, but this warrants a more detailed explanation in a future article.

NinetyOne’s starting point was that the most valuable insights into culture might lie in non-financial, non-reported data. They initiated a research project – working closely with Professor Edmans – to identify the key attributes possessed by companies with strong cultures. Their framework:

• Identifies four cultural attributes that arise more often in high-performing, high-quality, sustainable businesses over time.

• Includes a methodology to help analyse whether a company’s culture is consistent with its specific circumstances and business strategy.

The four attributes which they see as recurring elements in organisations with strong culture are:

Ownership mindset: entrepreneurship, employee involvement, decentralisation. A focus on business growth rather than the completion of tasks.

Example: Supercell Finnish games company

Recognition: rewards and recognition, financial involvement, personal ownership, fair pay.m - not just financial recognition but also peer to peer recognition.

Example: Costco

Trust: psychological safety, open and trusting, 2-way communication.

Example: Google’s moonshots

Support: career opportunities, caring for the individual, talent development. Support structures that motivate and develop employees.

Example: Home Depot’s inverted organisation structure

To assess if the culture is appropriate, the framework separates businesses by:

Quality: businesses with quality products prioritise the customer experience and place greater authority in the hands of those closest to the customer.

Flexibility: companies which engage in relentless innovation require cognitive diversity and often have small autonomous teams.

Cost and risk: businesses that focus on costs and/or managing risks need to minimise variance, have a lower tolerance for failure, and put a greater focus on process. Employee autonomy is less important.

I have omitted the fancy diagrams and the arrowed cycles. They acknowledge that companies are complex systems and typically opaque to outsiders.

NinetyOne have developed a questionnaire on company culture and work practices which their analysts can use and they believe that this confers them with a better understanding of culture and allows them to generate better performance.

When I listened to the presentation, I thought this was typical marketing hyperbole and probably total nonsense. A highly experienced professional investor agreed with me. Having read through their article and scanned the Edmans article, I am slightly more prepared to accept that applying a consistent lens to corporate culture may reveal some insights. And some may even deliver outperformance.

But I think generally that where the culture is strong, and where that may deliver better customer outcomes and lead to better stock performance, it’s pretty obvious. There are notable examples in commodity industries, where the culture can be a differentiating factor:

Ryanair: Michael O’Leary is famous for his relentless focus on costs. I recall his memo to staff travelling on business, requesting them to take the pens from the hotel rooms to save on stationery. O’Leary was inculcating staff with a save pennies mentality.

Old Dominion Freight Line: Maintaining the culture of a small family firm, encouraging employee share ownership, promoting from within, and a strong culture of trust in the employees has led to lower employee turnover in an industry where that tends to be high in stronger economic periods. The founding family continues to own a stake and lead the company, and it has been a great stock to own, in spite of industry volatility.

I used to dismiss much non-financial data as too fluffy. When you explore the concept of quality and think in longer term timeframes, however, the issues of how long competitive advantages may last becomes much more significant; and it’s helpful to be able at least to rank companies on such factors.

NinetyOne had a couple of interesting slides in their deck which were not covered in the presentation. One discussed their analysis of competitive advantage:

Where businesses have durable long term competitive advantages, the market tends to underestimate the amount and persistence of those returns. To assess this, they analyse:

Type of moat: brand, IP, regulatory barriers, scale advantages, mission critical product or service, first mover advantage, switching costs, distribution channel, network effects.

Company factors: culture, cost competitiveness, R&D, market share

Market factors: industry structure, pricing power, barriers to entry, availability of substitutes

These are all perfectly sensible and don’t require much further comment, although I find scale economies rare and first mover advantages rarely durable as moats. They segment their portfolio by competitive advantage:

Scale: 44%

Distribution 13%

Network effects 12%

Mission critical 9%

Tolerance for failure 8%

Switching costs 7%

Other 7% 

I wonder how they define scale as to achieve a durable advantage from economies of scale, as I said last week, you generally have to be much larger than your competitors – this is true of Amazon and Walmart in retail and Ryanair in airlines but it’s pretty rare.

There are also companies like Google search where the volume of searches allows a greater investment in R&D and allows the company to improve the relevance of its answers. There are probably quite a few like this, but I was surprised that 40% of their portfolio’s competitive advantage is attributed to scale. I wonder how durable that is?

They also provided an analysis of their portfolio by the duration of competitive advantage, which they state as 15 years (which is 3 years longer than is implied by the market price and 4 years longer than the ACWI average). The median company only has a 4 year advantage period which I think sounds more realistic.

Premium subscribers can read on for

• The stocks in that portfolio.

• The competitive advantage period estimated by NinetyOne for each of their stocks.

• Write-ups of 3 more quality stock ideas from the Quality-Growth conference.