Session by Mr. Thomas Russo- 2nd Value Investing Pioneers Summit ,Delhi 2018

Contributed By : Ashwini Damani, CFA

Lessons from Global Value Equity Investing

At the second Value Investing Pioneers Summit, Mr Thomas (Tom) Russo gave a talk on ‘Lessons from Global Value Equity Investing’. Given below is a summary of the talk.

• Tom Russo believes one can earn added alpha by deferring taxation, as any taxes not paid and deferred compound and add to overall returns. For deferring taxation, we need to invest in Long Term Ideas where we can minimize churn and hold for substantial period of time.
• Tom Russo is a big advocate of Investing in Multi National Corporation (MNCs) as because of their global nature, these companies have more opportunities to reinvest their free cash flows . He himself holds a lot of MNC’s in his portfolio. This reduces the need to churn the portfolio and look for new opportunities as he can keep holding on to the same businesses as they grow by investing their cash flows in markets which offer growth opportunities.
• The following factors as per him, make Global MNC’s very good investment candidates :

1. Capacity to reinvest free cash flows in various opportunities and countries. Very rare companies exist that can reinvest right amount of cash flows.
2. Global Population Growth allows them natural growth
3. Consumer Disposable Income growth also provides better ability to capture wallet share
4. Globally Adept Management, which are multilingual and multicultural: He mentioned that just like an Indian does not know names of any good Baseball Player, similarly Americans don’t know names of any Cricket Player. Very few people in the world speak more than 3 languages and yet there are some remarkable MNC’s that transcend borders and cultures and are able to operate in many countries.
5. There are rare companies that reinvest the ‘right’ amount. Most managements usually underinvest as they are worried about the impact on their earnings in short term and the resultant effect on stock prices and the value of their stock options.

• Capacity to Suffer: He further emphasized that he prefers to invest in Family Controlled companies. Family Controlled companies can say no to what wall street demands of them. They can thrash short term in pursuit of long term, give a long rope and lend support to management for the long term, thereby aligning interests and minimizing agency costs. Family controlled businesses normally have better vision.

1. For eg Berkshire Hathaway can afford to suffer by not succumbing to near term returns. Warren Buffett holds large cash reserves for long times and prefers to wait for big opportunities. This allow him to use these reserves to buy businesses at throwaway prices, because he is the only person available with cash
2. Nestle has a 35 year Planning Horizon
3. Sab Miller and Heineken prefer to wait for right time to invest. They don’t fear public backlash and don’t fear PL hit for short time

• Tom Russo looks for investment in business which have a lot of “White Space” – businesses which have a large underserved market which gives them repeated opportunities to reinvest large amounts of capital, such as :

• Global Payment Space 

1. Global Commerce continues to grow
2. 85% Global Commerce is still in Cash
3. He prefers MasterCard as a very good vehicle to play this space

• Luxury Branded Jewellery

• Global Jewellery Category has been growing consistently
• Within that, the luxury branded jewellery is gaining even more market share
• A very good alternate is to play this theme through Swatch and BRK

• Premium Spirits

1. 1.5 Billion Cases of Spirits consumed per year in China
2. The entire Western Premium Spirits market is just 4 million
3. So there is a huge runway and market opportunity available
4. He holds 10% of his portfolio in Pernod Ricard, Diageo and Brown Forman

• Sub Saharan African Beer

1. 400 million barrels of Beer is consumed per year in Sub Saharan Region
2. Whereas rest of the market sells only 100 million barrels of bottled, branded and refrigerated beer.
3. Best way to play this theme is to invest through Heineken, Anheuser-Busch Inbev
4. These businesses have a huge growth opportunity as there is a large unserved market.
5. They also have pricing power and demand in-elasticity as consumers of a beer brand like Heineken are usually loyal to it and do not like to change

• Global Whiskey Market

1. Global Spirits demand is showing healthy growth worldwide
2. The premium category continues to outgrow main spirits market
3. This offers price growth and price inelastic growth.

• Tom also gave examples of companies who lacked the “capacity to suffer” or took short term decisions to please wall street and destroyed shareholder value.
• At the end, Tom talked about how as a portfolio manager or investor who is looking to outperform over long term, should also have the capacity to suffer in the short term for long term benefit of the portfolio and investors. As an example, he explained how the portfolio of his partnership – Semper Vic Partners – depreciated by 2% in year 1999, when the DJIA was up by 27% due to the rally in tech stocks.  Due to the capacity to suffer that one bad year, the portfolio outperformed substantially for next five years.
• The learnings from Tom Russo’s session can be summarised in this quote from noted poet Khalil Gibran –
  “Out of suffering have emerged the strongest souls; the most massive characters are seared with scars”