Investment Podcast: The way Walter Scott & Partners Ltd. invests

Gareth Evans

Investment Research Analyst, Walter Scott & Partners Ltd

 

Craig Maddock

Senior Portfolio Manager and Vice-President

Investment Management and Strategy, MD Financial Management

 

Craig:

Thanks for spending the time with me to speak about investments today.

 

Gareth:

My pleasure.

 

Craig:

As you know we've been working now with Walter Scott for, oh gosh, 15 years.

It's nice to be here at the conference today.

At the same time, I think there's lots of interesting things going on around the world, so markets have been a little bit more volatile than we've seen, so I think the timing of this is pretty good.

I think - kind of unique - when I think about the conference and the topics of the conference being very long term in nature and yet we see the world, I said, with market volatility spiking right now.

It's kind of people wondering why isn't that maybe a topic at the conference? So, maybe give me a perspective as to why that isn't here and why we're not talking about macroeconomics or other things and maybe the way in Walter Scott thinks about investing.

Gareth:

Sure.

So, Walter Scott has the culture, the view that things are very much about the long term.

So, we recognize that there is day to day volatility in markets - there is obviously interesting topics - things that are, say, moving markets today and very volatile.

But we like to think about our investments over the very long term.

So the topic for this conference is horizons and horizons is very much about looking into

the distance and I guess that's how we try to think about our investments.

There's a long term horizon in terms of our overall view.

Craig:

Which i think is fantastic because I think there's too many people who think about the short term right now and are even worrying about the current trends that are going on and current even investment trends.

Like you think that in the U.S. the FANGs as an example the technology stock and just how fast-growing that seems to be and where all the focus is.

But I think about some of the companies you invest in, not to say you don't like those high growth or higher growing capable companies - you also have a lot of finally called simple companies that just play on very basic things that will probably make money regardless of what's going on regarding tariffs or interest rates or policy makers or all this stuff that seems to be in the news.

Can you maybe give us some examples of some companies that [we are] gonna call maybe  more simple and we'll work no matter what?

Gareth:

Yes - so one of the companies I particularly like is called KONE, who are a Finnish company and are basically manufacturers and installers of elevators.

Now, increasingly in certain geographies and developed markets, there is the continuing trend of urbanization and as markets, sorry, as individuals moved towards the cities and that space available for building and the demand grows, then the space available to be able to build shrinks.

Then a lot of people are now moving into high-rise apartments. Same for the office spaces. So KONE has a very significant opportunity long term, in terms of being able to continue to install elevators as the shift in urbanization continues.

They are also developing an opportunity to effectively act for predictive maintenance.

So, the idea of being able to service the installed base by effectively being able to anticipate when their elevators, through digital processes, might need maintenance to avoid the possibility of outages.

So therefore, ensuring that the use of the elevators is, you know, maintained as much as possible.

So that's one example that I certainly think it's a great, simple – relatively simple company - but again long-term opportunity is fantastic.

We also heard, in the conference just earlier today, a company called Edwards Lifesciences.

So, Edwards Lifesciences have developed a technology which enables them, effectively, to reduce the prospects or the need for invasive heart surgery, for people who are suffering from a conditional called aortic stenosis.

So, Edwards have developed a procedure called TAVR - so transcatheter aortic valve replacement.

The opportunity set for them is enormous because there are a large number of people, a large number of patients are undiagnosed with this condition.

So again, a relatively simple sort of condition but opportunity set very long term.

Craig:

So, thinking about Edwards - I think it's a relatively new company - you've added to the portfolio?

Gareth:

 Yes.

Craig:

Yeah, can you give an example of what it took to get that.

What made it a good enough case to be a stock in one in the portfolios?

Gareth:

So, we've invested in the healthcare space for a while.

And we like to look at companies who were able and capable of generating their own wealth internally and they've also got a differentiating factor.

One of the things about Edwards, is it spends a very significant percentage of its sales into research and development.

So, this enables the company, over the long term, to innovate in terms of the products they bring to market and generates high barriers of entry to the competition - which again is something that we look for when it comes to investing for the very long term.

The addressable potential, in terms of the size of the population that they are looking to help and treat, is very significant.

So today, the runway, in terms of the opportunity set, is again very significant and over a very long term, should provide them with the opportunity to grow their revenues sustainably over the very long term.

Craig:

I guess as you're thinking about these companies - so both very interesting kinds, very different companies as well, how are they perhaps resilient against tariffs and political issues and interest rates or how do those even factor into your thinking and figuring out how you want to own these companies, why you want to own them and how they may grow through time?

Gareth:

So when we look at these companies, and this is both for existing investments and also for new investments, the macro conditions are definitely part of the analysis, but we like to look at the companies from a bottom-up perspective.

That's the critical element.

So it's looking at the drivers of growth for those individual companies and that definitely involves having to think about the prospects of macro factors but the fundamental drivers of the individual company are far more important to us when we think about them in the long term.

Craig:

So it's a fair to say that regardless of the macro environment or what's going on around the world that you'll still focus on companies, how they're going to turn their profits and as a long-term investor in those companies who still should be able to generate a reasonable return?

Gareth:

Yes, so I mean the macro is definitely important and I guess if you took it to the extreme we would look at maybe certain countries in the world today where micro conditions are not very favorable.

We would probably struggle to find suitable investments in those countries.

So, it's not to say it's not an important part of the process.

It's just - it's not the only part and arguably the fundamental drivers of the company are the bit that's the overriding

Craig:

Fantastic thank you very much for spending some time with me today.

Gareth:

Thank you very much.

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