How WCM thrives in times of change

We bought networking companies, like Celestica, which was the first bottleneck, to power companies, like Siemens Energy which was the next bottleneck.

But then, as we have very good relationships with the management teams at the companies we buy, we ask Siemens Energy and GE Vernova, which are the two big suppliers of gas turbines, "What's your biggest bottleneck?" And both those companies said, "Our biggest bottleneck is there's no one out there to build these gas turbines."

So, we took that nugget and said: "Okay, how can we capitalise on that?" It turns out a billion-dollar company called Argan, ticker AGX that does build gas turbines and almost no one on Wall Street covers it. But you take this insight, and you're just curious, you keep peeling the onion. And so, you've seen our AI exposure be significant, but evolve over time to the next pocket of opportunity, as opposed to just buying NVIDIA or Broadcom and calling it a day.

Q: Covid was a big point of change for markets and investing, can you give us some examples of how the team navigated this change?

Sanjay: I think through that long bull market, from GFC to Covid, investors learned some rules. They conflated tailwinds with quality, and they labelled certain industries as good and certain industries as bad. And those turned from observations to assumptions over time. So what happened is you started to confuse a favourable environment with a favourable business, and as the conditions changed, it was very hard to adapt.

The luxury goods sector is a poster-child example of this. For 25 years, the rule in luxury goods was simple -  buy luxury goods stocks; they would go up year after year after year. And then within that, just buy the premium-end brands – LVMH, Ferrari, Hermès, Kering to some extent. Post-COVID, that broke, and it broke quickly. Premium brands, like the ones I mentioned, convinced themselves they had unlimited pricing power, and they badly underestimated that there was a one-time effect from COVID from the shift from goods to services. And as China slowed, that was a long-running tailwind that started to come to a crash.

And so, price vacuums opened up. All of a sudden, you have the one of the biggest price gap in history between premium luxury and affordable luxury brands like Coach, which is going through a cultural turnaround. Coach is owned by Tapestry, which we own in Select Global Growth. And so now these rules you learned, which was "buy luxury goods stocks" and "invest in the high end of luxury," were flipped on their head. You actually wanted to avoid luxury goods stocks since Covid, and if you were going to invest, invest in brands like Coach. And you saw this pattern in cruise lines versus hotels and parts of consumer goods, which we've played in.

A second example would be IT services. So, labour services can be a great business when you're on the right side of a supply-demand imbalance, and that's what it looked like for IT for 15 years, right? Buy Accenture, buy the Indian IT outsourcers, buy some of these mid-cap companies like EPAM and Globant. And there was an explosion in IT demand. Investors, because these stocks just went up year after year, started to say, "This is a good sector to invest in. These are quality growth companies on a long-running structural basis." Underestimating that the supply-demand cycle was cyclical. It was a long cycle, but it was cyclical. And Covid brought that to a halt. All of a sudden, you had an oversupply of software engineers and a significant roadbump in IT demand.

And what we did was to take that core insight that labour services businesses can be good, but only if the supply-demand balance is favourable. And we took that framework and applied it to blue-collar labour companies that employ electricians or HVAC technicians, because that post-Covid is where we feel you want to be. It's less about a company like Accenture, and it's more about a company like Comfort Systems, which is one the largest employer of electricians in the world. And, as you know, with the data centre demand, power is one of the biggest shortages. Comfort Systems appears to be incredibly well-positioned. But you're pattern matching, and you're saying services businesses can be good, assuming you have that right framework. So, what you've seen us do is see all these types of cycles emerging where companies were caught on the wrong side of Covid pull-forward dynamics.

Q: Your portfolio is very different from most other active managers, how do you find your ideas?

Sanjay: Everyone wants the fancy process slides with the funnel charts and lots of structure, as if that's the holy grail to finding ideas. That's just not how it works in practice.

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