We be­lieve buy­ing into the best com­pa­nies is the right strat­egy

The Herald - - PERSONAL FINANCE - DAVID COOMBS David Coombs is a fund man­ager at Rath­bones.

EVER since the 1950s, mid-term elec­tions have had a pretty benign ef­fect on Amer­i­can stock mar­kets. Fewer than 15 elec­tions isn’t enough data to be firmly con­fi­dent, but the US mar­ket tends to be rather di­rec­tion­less in the six months lead­ing up to the vote with a bit of ex­tra volatil­ity – much like this year. Then, the stock mar­ket typ­i­cally rose steadily in the fol­low­ing six months and the re­sult didn’t re­ally mat­ter one bit.

Of course, the past is no fore­cast of the fu­ture, but we think Wed­nes­day’s re­sult shouldn’t have too much im­pact on eq­ui­ties. The Democrats took con­trol of the House of Rep­re­sen­ta­tives, as ex­pected and in line with his­tory (Repub­li­can pres­i­dents tend to lose about seven per cent of House seats in mid-term elec­tions). But the Repub­li­cans strength­ened their hold in the Se­nate.

The main con­se­quence of los­ing con­trol of the House means Pres­i­dent Don­ald Trump’s fis­cal agenda will be ham­strung. Still, he has al­ready played his big fis­cal hands.

Be­sides, more than a few Democrats cam­paigned and won their seats on cen­trist plat­forms, pledg­ing in­fra­struc­ture spend­ing and a more co-op­er­a­tive re­la­tion­ship with the Pres­i­dent and Repub­li­cans. If both sides want bet­ter in­fra­struc­ture, there could be an out­side chance of a deal in the next cou­ple of years. Un­less fu­tile House Demo­crat im­peach­ment pro­ceed­ings swamp bi­par­ti­san feel­ings in vit­riol.

How­ever, we be­lieve the mid-terms – or the al­tered po­lit­i­cal en­vi­ron­ment they have ush­ered in – aren’t re­ally that im­por­tant. We in­vest heav­ily in the US, but that’s not be­cause of tax cuts, the prospect of an in­fra­struc­ture splurge or even dereg­u­la­tion. We buy Amer­i­can com­pa­nies, in the main, be­cause we feel they are the best in the world.

There is no Eu­ro­pean Google, no Ja­panese Ama­zon, no UK Visa. We aim to buy busi­nesses that are unique, that of­fer some­thing that other com­pa­nies can’t, whether through size, ser­vice or su­pe­rior tech­nol­ogy. They tend to have low lev­els of debt and make high re­turns rel­a­tive to the as­sets they use to op­er­ate, like build­ings, trucks, servers or fac­to­ries. We be­lieve that should make them more re­silient in a down­turn.

Sales for th­ese sorts of com­pa­nies tend to be less tied to eco­nomic growth. For in­stance, Visa ben­e­fits from peo­ple in­creas­ingly ditch­ing cash for elec­tronic pay­ments. This is un­likely to re­verse be­cause of lower global GDP growth. Sim­i­larly, Ama­zon is grow­ing rapidly, but most of that is due to it tak­ing other re­tail­ers’ mar­ket share as op­posed to the speed of ex­pan­sion in West­ern economies. The US grew by 2.9% over the past year; Ama­zon’s rev­enue in­creased 10 times as much.

Un­for­tu­nately, com­pa­nies like the ones we de­scribe don’t come cheap. This height­ens the risk that their prices could fall sharply over shorter pe­ri­ods if in­vestors take fright. We saw this in early Oc­to­ber when tech­nol­ogy com­pa­nies led the wider mar­ket lower, and then lower again. We be­lieve th­ese busi­nesses are the ones to own, es­pe­cially com­pared with oth­ers that seem more sus­cep­ti­ble to com­pe­ti­tion or from ris­ing bor­row­ing costs mak­ing their debts un­man­age­able.

So we are happy to take op­por­tu­ni­ties to buy when they fall, but we en­sure we hold other, more de­fen­sive as­sets, in­clud­ing a spread of for­eign cur­rency gov­ern­ment bonds and com­modi­ties like gold, to off­set the po­ten­tial for setbacks in stock mar­kets.

This isn’t fool­proof – we can’t fore­tell the fu­ture any more than oth­ers can. But we be­lieve own­ing the best com­pa­nies, the ones that of­fer what oth­ers can’t, is the best strat­egy.

We try to en­sure we do not over­pay, sell­ing small pro­por­tions of our share­hold­ings when prices look high and buy­ing them back when they dip. But buy­ing strug­gling com­pa­nies be­cause they are very cheap doesn’t make sense to us. In the end, it comes down to which busi­nesses we think will still be here in a decade. A reshuf­fle in Con­gress isn’t go­ing to change our opin­ions.

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