We have a principle in the creative industries that helps us remain focused, deliver more enjoyable outcomes for the readers/consumers of our content, and not get creative or writer's block while doing so: KISS (or, Keep It Simple, Stupid).
As investors, this may be increasingly more difficult to do, given there are now thousands of funds, ETFs and stocks on offer - with extensive research on each. So, with the amount of information at our fingertips increasing exponentially over the last three decades, are we becoming more informed or are we over-complicating investment to our detriment?
"Most investors, naturally, think all this data and IT will help them invest well," explains Stephen Arnold, the Managing Director and CIO of Aoris Investment Management.
"Yet, there is no evidence that businesses are more accurately priced in the stock market than they were 30 years ago."
Arnold believes that investors are better placed to keep their processes as simple and "common sense" as possible - make relatively few decisions each year and be aware of the many behavioural biases that come with being human.
Understanding and recognising these biases, and developing a process to recognise them, as well as keeping the portfolio to just 15 quality businesses - has helped the Aoris International Fund deliver its investors a return of 30.8% over the past 12 months, and 15.6% p.a since the Fund's inception (and outperforming its benchmark by 9.2% and 4.8% respectively).
In this piece, Arnold explains how the team did it, some of the stocks that have helped generate that stellar performance, as well as why he believes it is so important to learn from your mistakes, think independently and always strive for small but lasting improvements.
We own 15 international businesses that are leaders in growing markets, where they are consistently winning market share. They must be highly profitable, economically resilient, have breadth across multiple markets, and have been around for a long time. As owners, we will participate in the growth in intrinsic value of these businesses over time.
Then comes the price. If we can own them at some discount to their intrinsic value today, we will benefit from revaluation as share prices converge on fair value.
We try to keep our approach as simple and common sense as possible, make relatively few decisions each year, and be aware of the many behavioural biases that come with being human.
Two of our strongest contributors last year were Fastenal (NYSE: FAST), a US distributor of industrial parts, and Costco (NYSE: COST). Three common characteristics these businesses share are:
They are leaders in their markets and have consistently gained share through time.
They have extremely frugal cultures, which allows them to be both price-competitive and highly profitable.
They are run with a very long-term mindset. They are patient yet ambitious.
We discover and learn about businesses in multiple ways – reading widely, company visits and using quantitative screens. In the case of Copart, the founder wrote a book on the company’s history called Junk to Gold; I read it and was intrigued.
What makes our discovery process effective, I think, is having a clear sense of the business and management characteristics we are looking for. That means we can read an annual report and quickly make a good judgement as to whether this is a business that might be for us.
Then, it’s about getting to know the business, what’s special about it and the mindset with which it is managed. We do that through reading their public material and speaking and visiting them. We seek out businesses where management communicates clearly and transparently and wants us to understand them.
We want to be long-term owners of outstanding businesses. We know the operating environment won’t be easy every year, but the best companies will cope with challenges better than their peers. L’Oréal (EPA: OR) had a very good year in 2023, despite more cautious consumer spending, but many other beauty companies did not. LVMH (EPA: MC) had an excellent 2023, and that wasn’t the case for many of its competitors.
Helping to make 2023 a successful year for L’Oréal and LVMH were:
Their breadth across many categories and countries, such that consumer weakness in one market was balanced out by strength elsewhere.
Consistent profitability and strong balance sheets, allowing them to benefit when financially fragile competitors had to pull back on marketing and hiring as interest rates rose.
We certainly want to learn and improve. A challenge for investors is that you can get good outcomes from poor decisions, and vice versa, so we try to be as balanced and objective as we can in working out which is which. If you don’t acknowledge your investment errors, you won’t learn from them.
I think management and culture have never been more important to a company’s long-term growth and success. That’s because the actions and behaviours of most businesses are more visible than ever. The world is super competitive, and employees and customers have lots of choices. We look for businesses that have a high retention rate of customers and employees that feel well treated, and that consistently win new customers and hire new talent to support their growth.
A culture that has impressed me greatly is Cintas (NYSE: CTAS), America’s largest uniform rental and facility services company. We’ve owned the business in our Fund since its inception. Cintas has an employee handbook called The Spirit is the Difference, which spells out their culture and values and what’s expected of people who work there. In a nutshell, it’s all about adding value to its customers. The outcomes are amazing. Cintas keeps its customers on average for 25 years, consistently wins new customers, and grows twice as fast as its peer group.
In the three decades since I started in this industry, the amount of information and computing power investors have access to has increased exponentially. Most investors, naturally, think all this data and IT will help them invest well. Yet, there is no evidence that businesses are more accurately priced in the stock market than they were 30 years ago.
Investing, as I see it, is about judgements. As investors, we make assessments about the characteristics of a business, its durability, its risks, the values and priorities of the people who run it and what all that is worth.
As humans, we all have built-in flaws and biases that render the process of making good investment judgements difficult. At Aoris, we work hard to recognise our biases and create a culture and process that mitigates them. We also work hard to create small but lasting improvements in how we make investment judgements as a team.
There have been lots of lessons, but I’d distil it to these. We believe we will be successful as investors in a way that is durable if we:
Stay true to our business and investing principles,
Remain comfortable being different, and
Always strive to improve.
Aoris is a long-only, concentrated global equity fund manager with a Quality First, Value Investing philosophy.
Aoris seeks to grow wealth for investors through participating in the economics of unusually high-quality businesses. The portfolio owns up to 15 well established companies run by prudent and capable management. Each of which is highly diversified by serving many different end markets in many different countries. When they find these business, they look to only own them at attractive prices.
To learn more about the Aoris International Fund and see their full portfolio, click here.
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