Cusana’s Marshall-Lee on Founder-Led Companies

North Asian markets such as Korea and Taiwan. But what has been the main driver this year is the currency change you know, the weaker dollar has helped drive returns in some of the best performing markets. If we look at some of the top performing markets such as Korea, some of the Latin American countries, you know, the currency gains have accounted for maybe ten to thirty percent of the returns. So the outlook of the dollar is quite important.

I think we think going forward, you know, it has been a big driver in the first half of the year, but uh, you know, things will be changing going forward with the expected fed rache Chet cycle beginning again.

a commodities boom. I ended up being a mining analyst as well, and as a time, you can make ten times of money in mining sector. During my experience since ninety nine, you know, I became progressively aware that there were some very, very value generating companies in emerging markets, but they were kind of being offset by a whole bunch of companies which kind of go violently sideways or even violently down. And so when you look at the index, all you see is the combination of those two effects

going on. So the compound is being offset by the value destroyers effectively, and Henry Besenbind has done some really good work on that which highlights that in pretty much any stock market over time, it's a relatively small number

of companies that generate most of the returns. And that's something I kind of observed over my own experience, you know, over the first ten years of investing globally, but with you know, with a significant amount of emerging market experience in twenty eleven, and I had the fortunate ability to set up an emerging market strategy from scratch, having been a global port value manager for the a number of years before that, and because of my experience, and because

I didn't have any pre existing clown promises, I could think hard about what I was trying to achieve. And what I realized is you don't want to be tracking the index. You don't want to be measuring the risk relative to an index which is not your friend. So, for example, if you've got thirty percent of the index, which is state identities, which is broadly the number, those

companies are not run for shoeld of value creation. So unlike, for example, the US market, which on the whole is quite eva centric, that is absolutely not the case for large swathes of emerging markets. So although you might have, you know, for example, a commodity boom and things like this, there are some parts of the market which are creating value and a whole load of others which are destroying value, even if they have good years every now and then.

So rather than chasing those ups and downs of the oil price or whatever is driving those swings back and forwards. It's much better to understand whether value creation is really happening. And there are some great companies in emerging markets with some very long, strong underlying growth pinnings. But it's understanding what attributes you're looking forward doing that and then being able to construct a portfolio which captures those without worrying

about all the swings in the index. So all that kind of sign is kind of obvious, you know, where if the crazy risks from state identities and olig ar coned oil companies in Russia and those kind of things at the same time as created, you know, for example, investing in the brilliant consumer franchises in India. So you think it's well, of course, you know, why doesn't everyone do that? But the difficulty comes because everyone's kind of weighed against an index on an annual basis. You get

annual bonuses within a large investment house. The market convention from media and so on is to focus on the last twelve or eighteen months or rolling three years even and if you stand out from the crowd and do something different, you can look really silly for a period of time. So if all those state owned Chinese banks rally by fifty percent like they did in mid twenty fifteen, and you don't own them because you don't want to earn them, then you look a little bit foolish for

a while. And the question is can you stomach looking foolish for a while, or do you lose your job or do you use your cliants because you haven't given them reason to understand that you're going to do something different. But stepping back, you know, over the period since twenty eleven, the strategy that I started at that point and have run since then and at Kusana since twenty two has generated something like three or four times the index return

cumulatively over time. So the index has gone up a little bit, you know, each year, but it goes violently up and down on in a given calendar year. But stepping back from that, you know, we've had stots which have generated here multiples of return over a sustained long term period with a much larger position size, and so you actually generate a much higher return with a lower level of absolute growth. So stronger corporate governance, high return

on capital, businesses, strong balance sheets. These are the things that protect your capital. And it's a bit like when we look at the US mag seven it's a similar kind of effect. There are certain number of companies which actually generating those returns.

bad returns the next year. That happens with shipping the whole time, airlines. You know, that's the kind of the lower quality businesses, and it's most of the businesses, to be honest. Or in Brazil you have the corporate governance set up. The incentive structures for most management teams are focused on sales growth and EBITDAR growth, so They're focused on P and L growth, not value creation. So if I'm a manager in Brazil, what do I do? I raise capital, I do lots of M and a lots

of roll ups. I get paid, and I'm not creating any sustainable growth. So the shelters will go up and down and up and down. Actually they don't, you know, they don't have a long term good good journey.

They have something which is unique, which is their proposition to their customers, which they're able to charge for often with capitalized businesses with big barriers to entry.

And it is a completely different perspective on value. If you think you've got a cash earnings per sure which is companning at twenty percent, it's got a very different value from the mediocre which is compounding at four or five percent if you're lucky.

they're reinvesting wisely for the long term. They're trying to do the best for their customer base and the industry as well as making very acceptable profits for themselves. So that's a kind of a nice, you know, a nice

symbiotic relationship. We like founder led businesses, but ones that don't rip you off, which is kind of in stark contrast to you know, I don't know a Russian steel company owned by an oligarch who will be buying a shipping port for ten million dollars and then selling it to the LISCO for one hundred million dollars, extracting value

at your expense. And the obvious thing to do to look for that is look at return on capital and return on equity and cashlow measures of that on a through the cycle basis, so you can often see what

warning signs things that don't make sense. So we had we looked at a fast moving consumer goods company which made choco pies in South Korea, and we can't understand why it didn't seem to be profitable enough, and it's because they would make really nice cash flows, and then every now and then they go and buy a related party company an elevated valuation, so the effectively disenfranchising the minority investors. So we're looking at a whole raft of

different things. We have what we call the investment checklist, which is really all the learning points of my career since nineteen ninety nine as an investor and actually even before that was a chartered accountant, thinking about what are the things that allow us to have confidence in those businesses? What are the warning signs? We won't get over perfect.

But what we're trying to do is cut out nineteen ninety five percent of the market and focus on the top five or ten percent in order to identify the best twenty five or thirty opportunities for us to invest in with a five year horizon.

So you're a one year investor, it's kind of eighty percent about the multiple, which is that kind of the voting mechanism in Buffett's peak, versus twenty percent the kind.

the good ones and the bad ones becomes clearer. And so when we're we're valuing the companies, when we're assessing the different scenarios that we see before us, everything we're doing is with a five year view, and therefore, inherently that tends to kind of tie in pretty well with

our typical holding period. Now, because in the real world, share prices don't follow a nice classic compounding curve, even of the earnings per share and the cash earnings per shure moved in a perfectly smooth fifteen percent compound.

ad to stops which are done less well. So we're using a time advantage. If we're assessing things on a five year view and everyone else is working on a twelve eighteen month view, which is the kind of the typical in our view in the market, and perhaps even shorter in places like China. Then we find great stocks on sale periodically, and sometimes they get bid up to crazy prices, like internet companies did in late twenty twenty. So we want to be taking money off the table.

The risk reward is less good than other.

don't need to change much. We might concentrate it more into our top holdings, for example, and that's a sign of confidence and a sign of a steady temperament. Every now and then there's a reason why you need to change things more. So when we came to the end of twenty twenty, it was we moved from an deflationary period into an inflationary period. That does kind of cause you to want to kind of make some adjustments. So we shouldn't be afraid of managing. We don't manage to

a turnover level. But at our name term turnover, which is kind of reflective of how we invest, is around twenty percent. And then we have a kind of a topping entailing within the portfolio, as I said, trimming the kind of the strong performance and topping up some of the weaker ones. And that is so the actual turnout is more like forty or fifty percent.

rates and and so on. So you see this year with moving to more dissinflationy backdrop, and there's money exiting the US dollar from very extended levels after a ten year bill market. We're clearly seeing the dollar trading often. That tends to be very good for emerging market relative performance at the index level. Some of the reasons behind that. So you know, when the currency drops, it improves the kind of purchasing power within the emerging markets. Cost of

capital tends to drop. So we've seen bond yeals in many emerging markets going way below developed market bond yeals. It's a particularly interesting time actually, you know, I think the developed world is sort of hitting the limits in terms of fiscal affordability, you know, with aging populations and immigration and excessive promises, and so the market is done to call time on that by raising the cost of capital, just.

capital when you're valuing the equity market. It can stimulate growth, that can stimulate investment, that can stimulate earnings growth. And when you see more earnings growth coming through, particularly on domestic oriented companies, then the multiples tend to go up as well. So you end up having the current see and the earnings growth and bond yules and hence multiples

all kind of moving together at the same time. So most of the market is intend to have a very short term memory, so everyone kind of thinks about what's

happened over the last ten years. When the US market's done well and emerging market's done relatively poorly, But if you look at the decade before that, people kind of forget that emerging markets did a two hundred and fifty percent dollars a turn in the ten years up to twenty eleven, and then it's only since twenty eleven that there's been a kind of a tougher relative period, whereas the US market has done well where it did not

so well in the previous decades. So these things do tend to go in kind of waves, and arguably, you know, there's a there's a pretty strong possibility that we're in kind of one of those ways of transition.

a very interesting opportunity set. And here I'm not talking about the big banks or the big steel companies or the property companies who should have been going pop. I'm talking about the founder lad entrepreneurial growth companies, often technology and scale and efficiency leaders that have been moving up the value spectrum. And whereas historically China would import a lot of high quality or high technology goods, these days they're competing in the global market, so that Chinese are

really world classed. And I was at in Shanghai back in January and just traveling around the Yangti Delta, you know, two hundred and fifty million people, an incredible manufacturing complex. It's very very hard for the Japanese or Koreans and Europeans and US to compete. They're so efficient, they're so good. And then going to Malaysia and finding out everything there's a cost thirty or forty percent more. That's kind of

one of the China plus one places. They just they kind of hold the Chinese in are in terms of how good they are. So we tread carefully with China, but we do see significant opportunities. It's worth kind of bearing mind where we've come from. So you know, Chinese starts presented a huge opportunity. Over the ten years to twenty twenty, we did phenomenally well. Our holdings did really,

really well. So I'm thinking stops like ten Cent compounding at thirty or forty percent for a ten year period, so we have the same comparable value creation, in fact, probably ahead of a lot of the US market up

to that point. And then I think you had something of the power of large, large numbers, So likes of ten per cent of Ali Barbar became very large, and I think, you know, Jack Mark kind of overstepped the mark and that led to something of a clampdown to make sure they knew who was boss, you know, the Chinese Communist parties in charge and president she kind of you know, asserted that in the market, and I think

you had a hunkering down of certain companies. So the likes of ten you know, ten Cent, for example, is still a very good company, but its growth rate decelerated.

It it really kind of managed down its profitability. It was less you know, it's competing less in the market whilst it's trying to keep a low profile, and of course the growth rates and profitability went down a bit in the short term, so it's not the underlying businesses bust, it's just that they decelerated, and at the end of twenty twenty they've been overly you know, over highly valued with an extrapolation of the twenty twenty kind of internet

technology boom that we saw through the COVID period. So that led to you just plot a chart of the Chinese market against other markets globally, they'll see China had raced ahead and then are a very substantial pullback through twenty one, twenty two to twenty three, so you had a de rating period. We never thought China was oninvestable, but we were quite selective through that period. In fact, we invested a lot more in electric vehicle supply chain

and solar companies for example. And where we are today, I think there's been market repair, so the government realizes that it needs private enterprises to flourish, particularly as you're coming out of a property market correction, which is quite severe after a ten year bubble. So that property market is steadily deflating. It's leading to a lot of excess supply and all sorts of stuff, particularly basic materials and basic manufacturing, which is then flooding the global markets. I'm here,

I'm thinking cement and stuff like that. So you don't really want to be invested in those areas, and the government's trying to kind of sort that out. But when the government gets involved, you're probably best avoiding those kind of areas. At the same time, you know, you've still had these high quality, compounding businesses and they're being able to function again, and that's why those companies are really doing,

you know, quite well. So they're being allowed to re rate back to a more normal level from a very depressed level. The currency is strengthening against the dollar and against other things. You know, there's there's we're not expecting it, you know, a huge kind of macro boom off to

the races, but it's there. There's certainly a market repair story going on, and and and investors who've shied away from China kind of are rethinking that one and have been coming in at the margin, which is obviously been driving prices up. And then of course that gets domestic investors excited, and Chinese investors have a notorious casino mentality, so they get overly pessimistic and overly optimistic as well.

So I don't think we're into the full over optimistic thing, but the government's starting to get a little bit queasy on that, so it might start doing a little intervention to of hold the market back a little bit after some very strong rebounds. So in that kind of context, what do we do. We have something like twenty six percent or something of the portfolio within a benchmark agnostic strategy invested in China, but our holdings look very little

like the index. We're very select on the type of companies that we hold.

arguably even shorter. You know, when we're in meetings with Chinese investors, they're talking about the next month, maybe three months, whereas we're looking at about how a company is going to be changing and creating value over the next five plus years. It gives a very different perspective on risk reward.

It gives us a huge advantage if we have the temperaments and the process and the ability to understand value by looking further ahead than the market, because everyone else is kind of crowding around, making the short term very efficient, but the long term is much less efficient, particularly in emerging markets which are highly irritational. So if you're investing in a one year of view, something like eighty percent of your equation is about the multiple, which is, as

Buffett would say, a kind of a voting mechanism. So share prices are wabbling up and down depending on sentiment and perception on growth, Whereas if you're looking out five years, the compounding effect for good companies can really differentiate them, so you can grow through multiples quite quickly. So you know, if you think back to Apple in two thousand and four, it was training at one hundred times multiple. It turns out that was cheapest chips. You know, if you bought

those shares and to sat with them. You've made four or five yeah, something four hundred times your money since then because it's compounded at a very high rate. But the media at the time will be saying, oh, that stops really expensive, there's a bubble, and all that kind of stuff. But the key is what is the sustainable growth rate of that business? Why will some companies go up one thousand percent and somewhill go down fifty percent

from the same Starling multiple. And everything we're doing is trying to understand which are the good ones, which ones are going to be trying to invest in for the next five to ten plus years, and which ones to

avoid like the plague. And so the attributes that we're looking for are thinks like corporate governance, economic modes, the things that give us conviction that the company is generating a high return on capital when it's recycling its capital, and everything we're doing in terms of valuation is consistent with that. So we were trying to really understand the evaluation scenarios the companning of cash earnings per share out

for the next five or ten years. What is the market going to be thinking when it's looking at the company in five years time, when it's looking forwards and it's a different way of thinking, it takes a different approach. It's actually much lower risk because we own good companies, not rubbish companies we think are just going to bounce over the next three months. We're never going to guess what's going to happen over the next three months. Only

better than the market, we don't think. But we have a dramatic advantage in understanding the difference in compounding rates and understanding which of the great companies in that kind of context.

rate which is the real driver. A steady state business which is generating say a twenty percent return on capital or twenty percent ROE if it didn't pay any dividends out, its sustainable growth rate is defined by that steady return on equity, So the internal compounding of per share basis would be around twenty percent. Now, you can use the capital to buy back shares or pay out dividends and things like that, but effectively, that's the internalized growth rate.

If a company starts at a twenty percent ROI and goes to zero, you're going to lose a lot of money. And if it starts at what is optically a low return on equity and goes up a lot, you will make dramatically more than that compounding rate. So and then hopefully you're going to you know, tail off at that companding you know that twenty percent in five years time.

So those will be the best return companies, but they tend to be higher risk, so you might not want to be sticking your neck out too far on some of those situations. And in between, there's what we always called the narrowing GRS company, So it might be a ten percent row which is becoming a twenty percent hour awe, or which has a wider range of different scenarios around it.

So historically, a fast moving consumer goods company like hindusan Unilever something like that, like a Procter Ammal in the US would be compounding get maybe ten to fifteen percent rate, which is quite an attractive return for a very low risk investment. I don't think those FMTG companies as attracted these days. They've been structurally disadvantaged, but they would have been a classic, classic steady compounder, but not vastly exciting

for everyone who's trying to make a quick buck. The best compounders over the last ten years have really been those online platforms, so Google and Meta and companies like that, which have been capital like businesses with strong growth runways and pretty well managed and that's a lot and wide economic modes around them, and that's allowed them to protect their profitability and just reinvest in growth. That a pretty attractive incremental return. If you look to those more like

twenty years ago, they were much higher risk businesses. You know, they were much less established, they had much more threat to their business. AI might raise those threats back again for them. You know, there's a bit of an existential threat to some of those things, but if you can pick them up early, you'll make a lot of money.

So what we want room from the portfolio is a kind of a core of run you know, reasonably predictable, very well entrenched businesses, high cash generation, quite predictable levels of growth, strong balance sheets, good governance, those kind of things.

with those. So we're trying to have it like when you plant a garden, you don't want all your flowers to come through at the same time, and you want the kind of the nice ones, the evergreens, but then you want the nice flowers which come through at a later point in time if you look after them. And so that's really what we're trying to do. We're trying to create the portfolio for the future. And as a boutique.

You know, we're going to be smaller than you know, some of the very large investment managers out there, so we can have larger sizes and some of the small companies we think are going to be fabulous risk reward but where they would really struggle to build a meaningful position. Instead we can actually generate a more meaningful position size you're investing.

basically tax the most successful exporters the most. That was how they made the calculation. So inherently, if you're invest in more successful emerging markets, you actually had a greater tariff effect, and if you earn the less successful ones, you've got less tariffs.

are a bit more impacted than it's a potential risk. Similarly, you're almost kind of inversely, you know, if you look at an economy like India. So it's in the news about tariffs at the moment, but the tariff exposure of the Indian economy is very low relative to the internal growth engine. So India's a very well managed economy. It's got very strong government, been doing the right things, investing a lot in infrastructure, a very youthful population with relatively

low credit penetration, high productivity growth. So if I was Trump, I wouldn't be trying to ostracize India. I'd want to be friends and want to be you know, trading together and developing alongside each other, and you know, and not pushing them towards the Chinese, to be quite frank. But that's not what he's done. But we do know that Trump changes on a whim. You know, all these things are very personal. They're not well thought out economic strategies.

You know, he's just a bit and a bit of a huff with India because they didn't support him for a Nobel Peace Prize against Pakistan, which would have probably been ludicrous, to be honest. But so you know, we've got a fifty percent tariff today. It doesn't mean to say you can have fifty percent in a month's time, So I wouldn't worry about it too much. Of your

companies are not too impacted. We think India's one of the best, were probably the best of the major stock markets to be invested in over the next ten years. A lot of very high quality franchises, very well governed, with huge growth runways. So if you think about Coca Cola and Pepsi, the consumption of calbinated beverages in India's about four liters peranum compared with about one hundred and fifty liters peranum in Mexico and the US, So you've

got this long run growth runway. So if you have a really good company patching into that, they can generate some fantastic returns over the long term. And some of the stots we've held, you know, we've held them since twenty eleven, twenty fourteen and still hold them today and they've generated amazing returns. But we see the prospects of doing that for a long period to come. So tariffs do impact, but we have to be a bit careful

about over discounting them or over extrapolating them. We have to think just about trying to find the best companies in the context of what's happening in the world. It is a more fragmented world. We don't see that changing rapidly. But we've also got to be careful about worrying too much about TARIS, which can be really fickle.

it's easier for a young brand to challenge. E Commerce also disrupts the distribution advantages of a lot of FMCG companies and so on, So there are there are changes in you know, the relative competitiveness and where you can find the the best compounds in the future, it's okay, where are the barriers to entry? And often it's these

kind of network effects from online businesses. What we find is there's a lot of companies in emerging markets which must have you know, we're often either vastly expensive or unprofitable or excessively priced IPOs back in twenty twenty one, which are now really attractive businesses. So they consolidated those markets.

They've become profitable, but they're still early in their growth path, and it's a bit like you know, you're picking up the mag seven, ten, fifteen years ago in faster underlying growth markets. So we quite like those kind of online platforms that you know, monopoly doopoly businesses in frost growing

areas which are underpenetrated. It could be e commerce in Southeast Asia or the Uber of Southeast Asia that we own, and there's all sorts of these kind of businesses kicking around there if you look for them, and we find that far more attractive than just going owning the biggest bank or the Samsung in career or something, just because they happen to be big in the benchmark, so we think we can do a lot better than the benchmark over time.