Can outperformance become a habit?

To bring it to life, when I was coming into the business, companies like Amazon and Google were just starting to kind of enter their narrative inflections, but at that time, they were highly, highly controversial companies. Google was one Yahoo innovation away from extinction. Amazon was widely perceived to be a bad business. “How can you subsidise a shipping offering like Prime when you’re not profitable?”

Ten years ago, I was at Nvidia’s analyst day. There were less than 20 people there, sharp-shooting Jensen on how he could defend his gaming chip business against the great Intel. These things seem silly now, but it goes to show that narratives and fundamentals can inflect quickly.

And that’s really the name of the game with Select Global Growth Equity Fund: to take that moat trajectory and culture and apply them where you can really leverage that inflection period in a company’s life cycle, with the goal of capturing a disproportionate share of that company’s lifetime outperformance or alpha.

And our entire research process, research team, team design, is oriented around trying to recognize these stories early: not just in tech, or consumer, where conventional growth investors look. It’s just having that relentless curiosity, looking around the world, looking for pockets of inflections, using that moat trajectory and culture compass to help identify them, and then wrapping them very sensibly in a well-constructed portfolio.

The other distinction I’d mention is our Select Global Growth Equity Fund is unconstrained. So in many ways, it’s the most fun product to run. We can really flex all of WCM’s competitive assets, competitive advantages, and look in corners of the market where really no one’s looking. And time and again, we’ve been among the first buy-side investors of note to look at a company we end up investing in.

We have talked about why do money managers fail, what do people miss? I think, unless you’re highly intentional about it, the gravities of the industry are too powerful. They pull you towards conformity.

They pull you towards rigidity. They pull you towards complexity, and you see it time and again.

Most of the time, if you’re a successful manager – and we study this – you do one thing very well, but it’s very narrow, and the market rewards you for it. You do spectacularly, and then when the backdrop changes, as it has over the last five, six years, you just don’t have the toolkit or wherewithal to adapt, and you fade to irrelevance over a long period of time. It’s a backward-looking philosophy.

I would argue with conviction that moat trajectory and culture, and this concept of narrative inflections, they’re purpose-built for flexibility. They’re very forward-looking in nature. When you talk about the past five years, I think having that flexible portfolio and philosophy is what has enabled WCM, to pull away from some of our peer set in that quality growth camp.

Every business’s competitive advantage is ebbing and flowing, and what you want to own are companies where you can make the case for various reasons that the probabilities of their competitive advantage being stronger in the next decade are very high.

And I’ll give you an example. It’s an older example, but I think it’s the most brilliant. If we go back to 2007, and we were going to look for a really high-quality business with a huge competitive advantage selling at a discount to intrinsic value, which is what everybody looks for, we would have settled on Nokia.

In 2007, Nokia had approximately 53% share of the cell phone market. They were dominant across the globe, high returns on capital, no debt, lots of free cash flow, great brand, what’s not to love, selling at 60 cents on the dollar. In fact, most analysts on Wall Street had a buy recommendation on Nokia because it was dominant and it had a huge competitive advantage. Well, we don’t have to think very hard to see what ultimately happened with Nokia. Was that really a high-quality business?

Our argument would be no. If you’re looking at the directionality of the competitive advantage, you would have realised that that’s not a high-quality business because the competitive advantage was being eroded. We all know now, in hindsight, that Apple and Android completely destroyed that company.

Now, most managers, when they had a bad quarter or two, or three or four, would double down on their investment because they’d say, “Well, it’s still a dominant business, still has a great franchise and brand. Let’s buy more of it because it’s cheaper.” And that is a classic example of what the world does, Wall Street in particular, in terms of investing. So we’ve turned that on its head. The questions we ask are: what is the probability the business we want to invest in is going to be stronger, vis-à-vis everybody else in their industry?

If we get that right, we feel like we’re a long way toward a successful investment.

Two: we focus on the people.

Companies are about people. I always kind of chuckle when people talk about corporations as inanimate objects. They are not: they are full of people. We do a lot of work on culture and people and when we do our research we’re looking for three things:

We want to see a really strong alignment between the values and what they’re trying to do on the strategy side.

We want to see strength throughout the organisation, at every level, in those values.

And then, most importantly, we need to see adaptability in the company’s culture.

Now, Nokia is a great example. They were not willing to disrupt those old brick phones that they made in order to create the smartphone because it would take away their cash cow. So they lacked adaptability.

Wall Street only believes things exist that they can put in a spreadsheet, rank it, and score it. And with people, you can’t do that. You build a mosaic, and the mosaic is an art, and it takes a lot of work over a lot of time. But I will tell you, those two ideas – owning companies where the competitive advantage is getting stronger, and then making sure that they have a culture and a set of beliefs and people that will animate them to grow that competitive advantage over time. That’s the big picture idea in terms of how we have generated these kinds of returns and why we believe we should continue to be able to do so.