In your view, what are some of the ways the Covid-19 pandemic has changed the global business landscape?
Mike Trigg: Last year, we had a call with the CEO or CFO of probably every single company we owned – plus everything on our shortlist – and they were targeted conversations. We wanted to know how they thought they could grow their moat – or their strategic and competitive advantages – during such a challenging time. We also wanted to know what they were learning about their company culture in light of the public health and economic crisis. Of course initially, people were just trying to figure out how to keep the lights on and how to mobilize a remote workforce and things like that. But we’ve learned a lot, and I think we’re going to learn a lot more over time.
One sector that comes to mind is online retail. The biggest focus in that space has been around low price, large selection, and convenience – but that can leave many merchants out of luck. It can be difficult for some merchants to compete in a dynamic where their products might be positioned as loss leaders, or considered second priority when it comes to logistics. By contrast, we’ve seen other online retail platforms extend capital to their merchant base during the crisis – in some cases helping businesses that weren’t online previously to begin generating revenue there. This is an example where I think people will remember how certain companies behaved during the crisis, when businesses really needed them.
From trade wars to threats of stock exchange delistings, there’s been no shortage of risks and controversies related to US-China relations. Yet investment opportunities also abound in China. What excites you about this market?
Mike Trigg: I’d say it’s the world’s most inefficient equity market, with enormous alpha opportunities, and it’s increasingly become a target-rich environment for a growth-oriented investment approach. The entire WCM Investment Management team is excited about that. We’re putting a lot of resources there and it’s a long-term strategic pillar of our work in global equities.
China is a very immature market in many ways, but the business models we’re coming across there are just unbelievable. For example, there are large-scale biologic drug manufacturers helping to enable the growth of the Chinese biotech industry. The industry is in its early lifecycle, but companies are building scale and moving up the value chain. We see this across a whole spectrum of different industries, including semiconductors. There’s an understanding in China that semiconductors are of strategic importance and that outsourced producers of certain required materials may not be reliable long-term. Our research process helps to reveal opportunities like these that help make China super exciting.
Jon Tringale: One thing I would add about China in general is we’re not investing in a China index, or China as a country. We’re looking for traditional growth companies that are growing their moats in parts of the market we think have long-term tailwinds. We don’t look to participate in huge legacy telecom companies, big banks, or state-owned entities. We’re picking off select opportunities.
There has been increasing investor interest in ESG and sustainable investing. How do you consider issues of sustainability?
Jon Tringale: A lot of the work we do around culture – just our basic work on governance – has focused on sustainability for many, many years. In other words, there’s already an implicit ESG analysis – as people define it – in what we do. So we’re not a manager that’s throwing ESG in our marketing book and trying to conform to something that’s being pressed on us. We have a genuine belief that if you want to own businesses as we do – for five, ten years or longer – ESG considerations are qualitative risks that you need to pay attention to and have a good handle on.
Mike Trigg: Jon’s right. We didn’t wake up one day and decide to conform to ESG standards. Our emphasis on a company’s culture has existed since day one – it just turns out that it’s actually very relevant to an ESG framework. I think we’re much further along than many managers when it comes to the topic of ESG. We look at a company’s materiality as it relates to issues such as gender diversity. When a company can actually practice what they preach, those practices can become a competitive advantage. So, in the same way we think about moat trajectory, we really try to find companies where there’s a positive trajectory around ESG.
Moving forward, how do you think about companies in terms of “Covid winners” and “Covid losers”?
Jon Tringale: In 2020 there were certain names we were invested in that would fall into the “Covid winner” camp. But we hold other companies – for example, in the medical technology and medical device space – that could be considered “Covid losers” because of the decrease in activity related to standard medical care during the crisis. So while e-commerce and remote work companies have done great, there is a growth/value dynamic at play. Some managers have gone all in on tech, but we have confidence that relative to some of our growth peers, we’ll hold in there pretty well if a value rotation continues.
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