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DAVID NADEL: Broadly speaking we measure quality in a similar way to the way we do it implicitly
in US companies. It's just that in the non-US companies we have adopted a more formalized
approach to evaluating the quality of those businesses. So we use a scoring system that
we refer to internally as enterprise conviction scoring. It's a five topic scoring system.
The attractiveness of the sector is the first one. So think about the airline sector versus
the pharmaceutical sector. In the last 40 years, the airline sector has produced cumulatively
a loss. It's not a very good business inherently. The pharmaceutical sector routinely produces
very high returns on invested capital so we're attracted to some sectors, not attracted to
others. The second category is the competitive positioning that the company has. Essentially
what does the company do better or cheaper than its peers because those are essentially
the two ways companies can compete. The third category is the operating efficiency of the
business. So if they have pricing power, are they able to translate that pricing power
into cash flows? That's ultimately what we're interested in. The fourth category is the
financial track records. So what has been the history of the equity ratio? We're interested
in businesses that are at least 50% funded by equity. And what has been the history and
the components of the return vested capital, you know, is the return vested capital coming
from high margins or is it coming from high capital turns? We prefer businesses with high
profit margins because that indicates that there is some intellectual property to that
business, something that's really more defensible than high capital turns. The last category
is the corporate governance of the business. Is it a business that is good about disclosure,
is it a business that sticks to its knitting, or is it the sort of culture that does self-dealing
or is very likely to make an acquisition in a non-core business that's inferior et cetera.
We like businesses that stick to their knitting, stay focused, and are upfront with us. I mean,
that sounds obvious but that's really what we're trying to distinguish.