By Philip van Doorn, MarketWatch
For fund manager Brian Yacktman, the secret to winning performance is a concentrated portfolio of what he calls “global champions.”
Yacktman, who oversees the YCG Enhanced Fund, said such companies enjoy “enduring pricing power and long-term volume growth” as the global economy expands over time.
The YCG Enhanced Fund /zigman2/quotes/202412077/realtime YCGEX +1.02% was established in December 2012, has $225 million in assets and has a five-star rating from Morningstar (the highest). Its performance against benchmark indexes and its morningstar category is shown at the bottom of this article.
The “enhanced” portion of the fund is its sale of put and call options to generate additional income when placing limit orders to buy or sell stocks.
In an interview April 8, Yacktman said “nearly all businesses are deflationary over time, after you adjust for inflation, because competition and innovation drive down prices in real terms.”
That can easily be illustrated by the capabilities of smartphones. If we had purchased devices providing services such as GPS, videoconferencing and high-res digital photography, among others, when they were invented, the total cost over the years would have been sky-high. Today they’re cheap enough that around 2 billion people own them.
Yacktman went on to say something similar about commodities: Despite the assumption that commodities hold their value over time and can act as a hedge against sliding currency values, “over the past 100 years, they have been in a slow decline.”
So, few industries can maintain their sales as a percentage of gross domestic product (GDP) over time. One industry that has not suffered a decline in sales relative to global GDP, according to Yacktman, is advertising. The need to sell cannot be eliminated by technology. This is one reason Google holding company Alphabet /zigman2/quotes/205453964/composite GOOG +0.14% /zigman2/quotes/202490156/composite GOOGL +0.01% is one of the largest holdings of the YCG Enhanced Fund.
“Scare goods will have pricing power,” Yacktman said. “The obvious scarce good is our time, relative to the increased opportunities that are afforded to us by this increase in global wealth.”
The fund manager added that “the true value is to be had in time-saving filters.” He went on to say that in addition to long-term pricing power, he wants to see that a company has the potential for significant volume growth with a relatively low capital outlay and “an ownership-minded” management team — one with a lot of skin in the game.
He breaks down the time-saving filters into two buckets: information filters and “people” filters. Some companies, such as Colgate-Palmolive /zigman2/quotes/200774077/composite CL +0.05% , which has a dominant market share for toothpaste in many countries, actually serve as both types of filters — people trust its product and it might be a waste of time to try to find a slightly less expensive competing brand they may like. That gives the company pricing power.
Yacktman named many more examples of both types of time-saving filters.
”A people filter is essentially a good that increases attractiveness. Humans are tribal by nature. So good filters are an appeal to loyalty in a tribe or status within a tribe,” Yacktman said.
An excellent example is Nike /zigman2/quotes/203439053/composite NKE +0.62% . Many people “are willing to pay a premium to identify with their heroes,” he said. It is obvious from the company’s tremendous stable of famous athletes wearing its products and advertising for the company that nobody is better at the celebrity-endorsement game than Nike.
Some of Nike’s athletic shoes are very expensive. “A status filter has pricing power because if it is easily obtainable, it loses its status.”
Another people filter Yacktman discussed is L’Oreal SA /zigman2/quotes/204720038/delayed FR:OR +2.87% /zigman2/quotes/203477983/composite LRLCY +2.79% . “Personal care is one of the few industries that has grown its share of global GDP, going to 2.4% from 2.3% over the past 20 years,” he said.
That may not be much of a surprise, as more people around the world join the middle class, but it points to another need that people will continue to have, despite radical changes in technology.
“As discretionary wealth increases, there is an arms race to spend on beauty, Yacktman said. L’Oreal “can raise prices without push back, because for consumers it is a high-value add,” he said. In other words, consumers would rather go with a well-known, trusted brand that spend time and money to find a substitute.
Yacktman sees L’Oreal as similar to a bond with a triple-A rating. The company has “a short repurchase cycle and products considered mission-critical by users, so they grew revenue during the Great Recession,” he said.