As with all our strategies, there is no targeted allocation to this strategy. Given our bias towards long equity strategies and the importance of Compounders in a portfolio, this strategy naturally tends to have a high allocation than some of the other strategies in the fund.
In a long strategy, the investment increases in value when the price of the underlying investment increases. Conversely, it loses value when the price of the underlying investment falls. In other words, the portfolio is positively correlated with the underlying investment. In addition, any income earned on the underlying investment (such as dividends) is a positive return for the investment.
So, in a Long Equity – Compounders strategy, we seek out Compounders that we expect to increase in price going forward. As our mandate allows us to invest in private assets, some of these companies are privately-owned businesses that we uncover through our business networks. In the listed space, Compounders are challenging to find at attractive prices, for reasons we unpack below.
Compounders are companies with profitable underlying businesses. They can re-invest profits into doing more of the same (i.e. the existing business) or ancillary activities. Such companies typically apply laser focus to their core business, as they do not need to actively seek out other opportunities. Over time, the management teams of such businesses do the heavy lifting on our behalf, by reinvesting our profits back into the operations. Our investment is thus “compounded” by the management team, hence the name of this strategy.
The best management teams recognise when their opportunities are exhausted and then return profits to shareholders (through dividends and share buybacks).
Our biggest challenge lies in finding Compounders at attractive prices, as the market is usually efficient at recognising the quality of the businesses and the management teams. The shares normally reflect the market’s optimism about the future and are almost never “cheap” to purchase.
We thus wait for market dislocations or temporary disappointments in order to purchase investments in Compounders at attractive prices.