- Simon Hallett, the co-chief investment officer at Harding Loevner, specializes in pinpointing high-growth, high-quality stocks set to compound over the long-term.
- Hallett employs a 4-part stock-picking criteria which leans heavily on discipline, objectivity, and structure.
- Harding Loevner's Global Equity fund has outperformed the MSCI World Index for over 30 years.
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"So, for us, successful investing is — Charlie Munger said, it's a matter of finding a bunch of good companies and sitting on your behind."
That's what Simon Hallett, the co-chief investment officer at Harding Loevner, said on the "Masters in Business" podcast in reference to his firm's simplistic, less-is-more approach to investing.
"The trouble is, most people can't sit on their behind for so long," he said.
At Harding Loevner, Hallett employs a disciplined, objective, and long-term strategy when it comes to making and vetting investments. He sets rules and sticks to them. As a result, there's not much wiggle room for emotional, behavioral, or subjective decision-making — common snares that tend to upend investor performance — to infiltrate his resolutions. For the last 30 years, that methodology has been overwhelmingly successful and has helped the firm to swell to over $72 billion in assets under management.
Here's a snapshot of the fund's performance up to June 30, 2020. Since 1989, Harding Loevner's Global Equity fund has outperformed the MSCI World Index by 2.41% net of fees. PayPal, Vertex Pharmaceuticals, Lonza, Alphabet, Roper, Illumina, Apple, Facebook, Tencent, and First Republic Bank are the ten largest holdings within the fund and account for nearly 30% of assets.
Hallett says that the firm's stock-picking approach is "relentlessly bottoms-up." The goal is simple: pinpoint high-quality, high-growth companies that can compound over long-periods of time at a reasonable price. Macroeconomic forecasts don't play much of a role in the selection or construction of a portfolio.
"We're investment people, we're kind of curious about the world and we're opinionated," he said. "So, we have opinions about the macroeconomic environment but we tried very hard not to let it influence our portfolios."
That philosophy led Hallett to develop a four-part criteria for selecting stocks. Here's how he goes about finding the next big winners.
1. Competitive advantage
To Hallett, a competitive advantage can be boiled down to a simple question: "What is it that this company does well that gives it an advantage in the industry in which which it competes?"
In conjunction with Michael Porter's five forces — which look at competition, new entrants, power of consumers, power of suppliers, and threat of alternatives — Hallett says that competitive advantages can be seen in high margins and strong cash flow return on investment.
Hallett isn't the only investor with an affinity for strong competitive advantages. Warren Buffett — arguably the world's most famous investor — puts competitive advantages, or "moats," at the forefront of his investment methodology as well. Bruce Greenwald — the Robert Heilbrunn professor emeritus of finance and asset management at Columbia Business School — shared a simple way to calculate a company's moat.
2. High-quality management
Although discerning high-quality management is inherently subjective, Hallett was able to figure out a way to remove some of the ambiguity. To him, the way management routes capital to shareholders and allocates it for future prosperity is imperative.
"So, we are, today, much more objective in how we assess management," he said. "And just to give a little bit of detail on that particular one, we quite early on, started using cash flow return on investment based on the work of people like Michael Mauboussin, not just to value companies but to assess the abilities of management, not just to generate free cash flow about how they allocate it."
"The other aspect of high-quality management for us is corporate governance, which is essentially how those high returns on capital end up with shareholders," he said. "Are they retained in the company, are they paid out in dividends, are they distributed via buybacks or are they used to further the interest of other stakeholders, most noticeably, of course, the executives of the company?"
3. Financial strength
To Hallett, financial strength doesn't just mean low leverage. It's the access to capital in a way that's sustained during periods of volatility that's really important.
"So, we like companies that have financial strength through generating their own cash flow or at least have sufficient reserves to tide them over the time when they're going to be generating cash flows," he said.
4. Sustainable growth
Hallett's favorite example of a company with sustainable growth is Nestle. It's a stock the firm has owned for 30 years.
"It never or very rarely grows earnings more than 15 or 20%. It usually grows earnings at seven or eight percent," he said. "It reinvests its cash flows — over 30 years the annualized returns on Nestle are about 12%. Massively more than our portfolios, by the way. And much more than the market."
He added: "So, it's that ability to compound reasonable growth over long periods of time that never gets dramatically overpriced in the market, and is really where the core of our return should be."
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