The S&P 500 Index returned 20.54% and the S&P Global Broad Market Index returned 19.95% in the quarter ended June 30, 2020.1
In many of our past letters, we’ve picked a specific company and written a deep dive on it, with the hope that you’ll better understand one of the businesses that you own as well as appreciate the depth of analysis we do before introducing a stock into your portfolio. However, given the economic, political, and virus uncertainty that we’re all facing, we think it’s much more important to communicate our thoughts on risk management. We have two main risk-management principles:
Principle #1: Bet only on outcomes that we deem to be highly probable
Our high-conviction beliefs are as follows:
- Global wealth will continue to rise over time.
- There are going to be economic bumps in the road from time to time, and neither we, nor anyone else, can know in advance when they’ll occur, where they’ll occur, or how big they’ll be.
- Many investors want to get rich quickly and are overconfident about their abilities, causing them to generally overvalue risky stocks and undervalue the stocks of businesses with high and sustainable returns.
- Enduring pricing power is the most important determinant of high and sustainable returns. We define enduring pricing power as the ability of a company to a) charge a large premium for products or services that are virtually identical to those of their competitors and b) maintain or grow that premium pricing for decades while still growing volumes at healthy rates.
- Enduring pricing power most often occurs in businesses that operate dominant networks in industries that grow at least as fast as GDP over time. The network effects give the business the ability to charge a large premium versus competitors, and the GDP-or-better growth of the industry enables the business to raise prices at least as fast as inflation over time.
- Businesses run by founders or families or CEOs with large ownership stakes are generally incentivized to better allocate capital for the long-run and therefore more likely to maintain or grow their pricing power over time.
- Buying businesses with high and sustainable returns at prices where our estimated forward rate of return is meaningfully higher than the risk-free rate generally results in satisfactory long-term investment outcomes (i.e. paying a reasonable price for a great business tends to work out well).
Principle #2: Try and minimize damage to the portfolio if we’re wrong
We attempt to accomplish this goal by preferencing the following business and portfolio characteristics:
Business
- Number one or two by market share in its industry
- Strong product, customer, and geographic diversification
- Low operational leverage as demonstrated by high returns on capital, gross margins, and profit margins and/or significant variable costs
- Low financial leverage, preferably net cash
- History of relatively consistent revenue demand across the business cycle
- History of generating excess free cash flow even in recessions
- Run by owners who’ve shown a long history of treating minority shareholders fairly
- Headquartered in a country that protects minority shareholder rights through strong cultural norms and legal precedence
Portfolio
- Strict upper-bound on how much of the portfolio we will invest in any one stock or industry
- Wide diversification across industry, product category, geography, types of technological disruption risk, and macroeconomic factors (interest-rate sensitivity, cyclicality, etc.)
- Reduction of other company-specific idiosyncratic risks. For example, if multiple businesses in the same industry have dominant networks, similar risk-adjusted returns, and strong owner-oriented management teams, own them all so as to minimize the risk of surprise capital allocation or strategy decisions
Risk Management Principles in Practice
Now that we’ve explained our principles, let’s look at some of the ways we’ve applied these principles in practice. Below, we’ve divided the portfolio into sixteen categories. By measuring the portfolio this way and grouping stocks together by type of business and thus also by risk factor (since similar businesses generally have similar risks), we are better able to limit our exposure to any one future outcome. After each category, we list a representative example with a short paragraph describing why we like the business. We recently completed this exercise for most of the businesses in your portfolio, which you can see at https://ycginvestments.com/commentary/. As you read through the list, notice how similar many of the descriptions are and how they almost all possess the two key characteristics we described earlier in the letter: 1) they operate a dominant network; and 2) they operate in a category that we believe will continue to grow at least as fast as GDP (i.e. remain the same or even grow as a percentage of people’s and/or businesses’ budgets). Also, as you look at the complete list on our website as well as in your particular portfolio, notice how, in many cases, we own multiple businesses in each category to further reduce idiosyncratic risk.
Household Products/Personal Care/Packaged Food/Beverages
Representative Example: Unilever
In a crowded, competitive world where time is an ever-scarcer resource, people desire filters that can help them save time or identify potential collaborators. By creating belief networks that connect their brands to certain characteristics, consumer products companies provide consumers with valuable filtering tools. Unilever has created one of the largest collections of consumer product belief networks ever. Through savvy marketing, innovative design, a strong heritage, and brilliant acquisitions, Unilever has assembled and cultivated a collection of brands that stand for everything from quality to beauty to consistency to sustainable environmentalism. This stable of iconic brands, which literally numbers in the dozens, includes industry powerhouses such as Dove, Lifebuoy, Knorr, Lux, Sunlight, Vim, and Lipton. The strength of Unilever’s brand portfolio is evidenced by both its size and scope. Many of the company’s brands are globally recognized and span a variety of disparate product areas, everything from soap to hair care to household cleaning to soup and meal mixes, each of which is a large and growing revenue generator for the company. Moreover, the company’s brands have strong heritages and deeply-entrenched mindshare, with many of the brands having established meaningful market share in many developed and emerging markets well over a hundred years ago. This heritage aspect is particularly important since new brands can’t go back in time and create a heritage, putting them at a disadvantage versus incumbent brands such as those in Unilever’s portfolio. As a result of the social signaling value of some of the company’s brands in addition to the low-cost information filtering functions they provide (they’re quite cheap relative to most people’s incomes), we believe Unilever is likely to grow both its volume and pricing over time.
Cosmetics/Skin Care/Beauty
Representative Example: Estee Lauder
In a crowded, competitive world where time is an ever-scarcer resource, people desire filters that can help them quickly identify high-value collaborators. By creating belief networks that connect their brands to certain characteristics, luxury goods companies provide consumers with valuable filtering tools. Estee Lauder has created one of the largest collections of luxury beauty belief networks ever. Through savvy marketing, innovative design, a storied heritage, and brilliant acquisitions, Estee Lauder has assembled and cultivated a collection of brands that many consumers believe are synonymous with beauty, wealth, culture, coolness, and status. This stable of iconic brands, which literally numbers in the dozens, includes industry powerhouses such as Estee Lauder, MAC, Aveda, La Mer, Bobbi Brown, Too Faced, and Tom Ford Beauty. The strength of Estee Lauder’s brands is evidenced by both their size and scope. The company’s brands are globally recognized and span a variety of disparate beauty product areas, everything from makeup to skincare to fragrance to hair care, each of which is a large and rapidly growing revenue generator for the company. Moreover, the company has a storied heritage connected to celebrities, entertainers, supermodels, and centers of culture going back, in some cases, for over a hundred years. This heritage aspect is particularly important since new brands can’t go back in time and create a heritage, putting them at a huge disadvantage versus incumbent brands such as those in Estee Lauder’s portfolio. As a result of the social signaling value of the company’s brands, we believe Estee Lauder is likely to grow both its volume and pricing over time. In fact, we believe its pricing outlook is among the most favorable in our whole portfolio. Because signals of loyalty to a group and status with a group are only reliable so long as they are costly to send, Estee Lauder has to raise its prices as wealth increases in order to maintain its brands’ value propositions. This pricing power is further reinforced by favorable industry tailwinds. Whereas many industries have shrunk as a percentage of budgets over time, spending on personal care as a percentage of global consumer expenditures has grown from 2.33% in 1996 to 2.41%2 by the end of 2016. Not only does Estee Lauder benefit from enduring pricing power and long-term volume growth opportunities, but its products are also disposable and have short repurchase cycles, causing their demand to be fairly stable across various economic environments. In fact, global cosmetics revenue even grew during the recession of 2008.
Athletic Shoes/Sportswear
Representative Example: Nike
In a crowded, competitive world where time is an ever-scarcer resource, people desire filters that can help them quickly identify high-value collaborators. By creating belief networks that connect their brands to certain characteristics, luxury goods companies provide consumers with valuable filtering tools. Nike has created one of the most robust luxury goods belief networks ever. Through savvy marketing, impressive design, and a storied heritage, Nike has cultivated a brand that many consumers believe stands for the epitome of athleticism, power, fitness, wealth, and coolness. The strength of this brand is evidenced by both its size and scope. The Nike brand is globally recognized and, in fact, is almost akin to a global luxury language. The brand is so strong that the company has successfully attached it to a variety of product areas, everything from sneakers to athletic apparel to fashion and fashion accessories, each of which is a large and rapidly growing revenue generator for the company. Moreover, the company has spent billions to create a storied heritage that connects their brand to legendary athletes, teams, celebrities, and centers of culture and competition going back to its founding in Oregon in 1964. This heritage aspect is particularly important since new brands can’t go back in time and create a heritage, putting them at a huge disadvantage versus incumbents such as Nike. As a result of its strength as a people filter, we believe Nike is likely to grow both its volume and pricing over time, particularly as billions more people are added to the global middle class and the value of their belief network likely grows even stronger. In fact, we believe its pricing outlook is among the most favorable in our whole portfolio. Even if competitors create virtually identical products, for the aforementioned reasons, we believe Nike will be able to continue to sell its products at a premium. Furthermore, because the Nike brand serves as a signal of athleticism, power, fitness, wealth, and coolness, and this signal is only reliable if it is costly to send, Nike has to raise its prices as wealth increases in order to maintain the brand’s value proposition.
Traditional Luxury Goods (Handbags, Clothing & Accessories, Jewelry, Exotic Sports Cars)
Representative Example: Hermès
In a crowded, competitive world where time is an ever-scarcer resource, people desire filters that can help them quickly identify high-value collaborators. By creating belief networks that connect their brands to certain characteristics, luxury goods companies provide consumers with valuable filtering tools. Hermès has created one of the most robust luxury goods belief networks ever. Through savvy marketing, impressive craftsmanship, and a storied heritage, Hermès has cultivated a brand that many consumers believe stands for the epitome of wealth, culture, and status. The strength of this brand is evidenced by both its size and scope. The Hermès brand is globally recognized and, in fact, is almost akin to a global luxury language. The brand is so strong that the company has successfully attached it to a variety of disparate product areas, everything from leather goods to fashion and fashion accessories to perfumes to watches, each of which is a large and rapidly growing revenue generator for the company. Moreover, the company has a storied heritage connected to celebrities, royalty, and centers of culture going back to its founding in Paris in 1837. This heritage aspect is particularly important since new brands can’t go back in time and create a heritage, putting them at a huge disadvantage versus incumbents such as Hermès. As a result of its strength as a people filter, we believe Hermès is likely to grow both its volume and pricing over time, particularly as billions more people are added to the global middle class and the value of their belief network likely grows even stronger. In fact, we believe its pricing outlook is among the most favorable in our whole portfolio. Even if an artisan from an Hermès workshop handcrafted an identical bag, it would sell at a fraction of the price because it would not be part of Hermès’ global belief network. Furthermore, because the Hermès brand serves as a signal of wealth, culture, and status, and this signal is only reliable if it is costly to send, Hermès has to raise its prices as wealth increases in order to maintain the brand’s value proposition. For example, whereas most handbags have become cheaper over time after adjusting for inflation, Hermès’ Birkin bag pricing has grown faster than inflation.
Payment Processing
Representative Example: Mastercard
Excluding China, where UnionPay has a monopoly, Mastercard is the second largest payment card processor in the world with a 27% market share as of 2017.3 As a result of its virtually unrivaled global network of merchant, consumer, banking, and corporate relationships, we believe Mastercard is in a great position to benefit both from global GDP growth and from the secular trend away from cash, which still remains the method of payment in 77% of the world’s transactions.4 Moreover, because network value rises exponentially as new participants join a network, we believe Mastercard is both incredibly difficult to disrupt and highly likely to maintain or even increase its pricing power over time. Remarkably, despite the long runway for growth opportunities, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.
Financial Markets Benchmarks/Analytics
Representative Example: MSCI
MSCI is a leading index provider that has essentially become a global language. In other words, for stock, bond, and derivatives markets, its indices, such as its flagship MSCI All Country World Index, are used by investors and allocators to communicate about investment performance. Because crowded information marketplaces are generally quite inefficient, requiring participants to maintain background knowledge on numerous providers and analytical methodologies, industries such as index construction and maintenance tend to coalesce around one or two standards. While many developed markets primarily use non-MSCI benchmarks (such as the S&P 500 in the U.S.), MSCI’s global and emerging markets stock indices are the globally recognized standards in their categories and possess far larger usage networks and far more data than any of their competitors. Additionally, the scope of their networks is unmatched. They provide the most complete benchmarking solution for global allocators because of their dominant positions in global and regional benchmarking as well as in the emerging markets, which overwhelm the developed markets in number and will eventually overwhelm them in dollars of market capitalization as well. Additionally, they began publishing performance data for their market-leading indices starting, in some cases, over forty years ago, and they provide analytical support and software that increases the use-cases for the data. Thus, subscriptions to their data become a “must have” for industry participants, as demonstrated by their high retention rates. Moreover, most corporations and governments, along with most large endowments, pension plans, and sovereign wealth funds, are run by employees instead of owners, further solidifying MSCI’s competitive position because employees are incentivized to make the “safe” choice (in this case, by selecting the industry standard MSCI benchmark instead of an upstart). Additional tailwinds we believe MSCI will continue to capitalize on are the trend towards indexing and the “slicing-and-dicing” of portfolios based on ESG characteristics. As a result of these industry and competitive dynamics, we believe MSCI is likely to grow volume and pricing at attractive rates for years to come. Remarkably, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.
Rating Agencies
Representative Example: Moody’s
Moody’s sells credit ratings to corporations, governments, and banks so that they can raise debt from the capital markets. The industry in which they participate, debt capital markets, possesses favorable long-term growth prospects. Debt issuance has historically grown at least as fast as GDP, and capital market bond issuance has grown even faster as it has taken share from banking loans. Over the long term, we believe this GDP-or-better growth is likely to continue. Moody’s serves as a key information filter in this industry. Moody’s charges corporations approximately 7 basis points5 to rate their bonds yet likely saves them 30 to 50 basis points6 in annual borrowing costs. Moody’s benefits from both protocol and data network effects. Because crowded information marketplaces are generally quite inefficient, requiring participants to maintain background knowledge on numerous providers and analytical methodologies, industries such as credit ratings tend to coalesce around one or two standards (i.e. protocols). Moody’s and its main competitor, Standard & Poor’s, are the globally-recognized credit rating standards with far larger networks and far more data than any of their competitors. Additionally, the scope of their networks is unmatched. They provide corporate, government, and structured product credit data going back, in some cases, over a hundred years, and they provide analytical support and software that increases the use-cases for the data. Moreover, most corporations and governments, along with most large endowments, pension plans, and sovereign wealth funds, are run by employees instead of owners, further solidifying Moody’s competitive position because employees are incentivized to make the “safe” choice (in this case, by hiring an industry leader like Moody’s for their credit rating needs instead of an upstart). Finally, for much of Moody’s history, the U.S. government and its various regulatory bodies made Moody’s and a few other specially-designated rating agencies so important to banks’ bond purchases that it made their ratings almost mandatory for most corporations and governments, which led to Moody’s becoming one of the entrenched, global “languages” in the ratings business today. As a result of these industry and competitive dynamics, we believe Moody’s is likely to grow volume and pricing at attractive rates for years to come. Remarkably, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.
Insurance Data Analytics
Representative Example: Verisk
Verisk is a data analytics and risk assessment firm with dominant positions in insurance and energy information services. Of these two segments, insurance accounts for the vast majority of Verisk’s value. Insurance is a fairly acyclical industry and has historically grown in line with GDP, naturally growing as business activity grows. Verisk serves this industry by collecting sensitive and proprietary data from insurance companies, and then these companies, in turn, subscribe to Verisk’s mission critical data and analytics to optimize their pricing as they underwrite policies. Since the network effects inherent in this business make their database nearly impossible to replicate, and their cost is a very small percentage of company budgets, they can almost imperceptibly pass on price increases year after year which drop to the bottom line and allow them to boast high profit margins. Due to this pricing power and developing new support solutions that are deeply integrated into customer work-flows, we believe Verisk is likely to grow both pricing and volume faster than its industry over time.
Insurance Brokerages
Examples: Aon
Aon is the second largest insurance brokerage in the world. They operate in a fairly acyclical industry that has maintained its share of GDP over time, naturally growing as business activity grows. Additionally, there is some measure of built-in inflation protection because as inflations rises, so do premiums and the fees they collect on those premiums. As a result of its virtually unrivaled global network of insurance buyers, sellers, and knowledgeable brokers, we believe Aon is in a great position to maintain its pricing power and act as a toll taker on global insurance activity. In fact, because two drivers of this growth, globalization and urbanization,7 will increase the value of large insurance networks, we believe Aon is likely to be able to grow both pricing and volume faster than its industry over time. Moreover, most businesses are run by employees instead of owners, further solidifying Aon’s competitive position because employees are incentivized to make the “safe” choice (in this case, by hiring an industry leader like Aon to analyze their complex insurance needs, resulting in sticky relationships). Finally, because they earn interest on the premiums they collect, their business benefits from rising interest rates. This earnings boost could potentially help offset a compressing valuation multiple in a rising interest rate environment.
Banks
Representative Example: Bank of America
Bank of America is the largest bank in the United States by share of domestic deposits with a little over 10% of the market.8 The banking industry is attractive because deposits, which are the raw material that lead to earnings, have grown every single year since 1948 and at a pace faster than GDP. Furthermore, contrary to popular belief, the banking industry has been profitable in 83 of the last 85 years. Large banks tend to be good businesses because, through deposits, they are able to borrow money at a low rate relative to their competitors, primarily non-bank corporations and smaller banks. This funding cost advantage occurs because 1) the government guarantees bank deposits up to $250,000 per account, 2) the industry is highly regulated, creating barriers to entry, 3) among banks, many customers value the liquidity, security, and convenience that the large banks provide over the higher interest rate they could earn if they deposited their money elsewhere, and 4) switching costs prevent most customers from constantly shopping and bouncing around for the highest deposit rates among the large banks. While this funding advantage is the most critical, it’s not the only advantage the large banks possess. After much consolidation in the industry, the large banks also possess superior geographic and product diversification that reduces the risk of their loan portfolio relative to more specialized lenders as well as economies-of-scale cost advantages in areas such as technology, cybersecurity, regulation, and marketing. For all these reasons, in addition to the much-improved balance sheets of both the banks and the average U.S. consumer post the financial crisis, we believe the large banks are likely to generate returns on equity that are significantly higher than their cost of capital over time. Finally, their business benefits from rising interest rates, so they may act as an interest rate hedge to the overall portfolio should rates surprise to the upside.
Online Brokerages
Representative Example: Charles Schwab
Schwab is the largest discount brokerage in the United States with trillions in client assets, enabling them to be the lowest cost producer in their industry. In other words, they are able to offer the largest selection of products and services relevant to the financial industry at the lowest prices possible. This scale advantage is a virtuous cycle, allowing them to continue to gather assets at a quick pace, which in turn, allows them to continue to offer the best-in-class technology and suite of wealth management products and services. Instead of having a traditional cost of entry with pricing power, Schwab’s cost of entry is the low rates it offers on deposits where they can earn a spread. They further increase their earning power by charging third party vendors, such as mutual funds, to access their massive network of users. Thus, even though asset allocation is much like a commodity service where prices are being driven down, because Schwab has created a virtually unrivaled network of investors, financial advisors, and wealth management products and services, it has pricing power through low cost deposits as well as fees to its third-party sellers. As a result, we believe Schwab is well positioned to essentially act as a toll taker on growing global wealth and to continue to increase market share of deposits and financial assets. Finally, their business benefits from rising interest rates, so they may act as an interest rate hedge to the overall portfolio should interest rates surprise to the upside.
Auto Salvage/Insurance
Representative Example: Copart
Copart is the largest provider of online salvage vehicle auctions in the world. They operate in an industry that is typically recession resistant as accidents continue and salvage rates increase when used car values drop in recessionary environments, offsetting a decrease in miles driven. They benefit from a “not-in-my-backyard” principle by owning the most salvage yards, which also reduces their cost structure relative to competition. They have a dominant position in the United States, strong positions in Canada and the UK, and huge reinvestment opportunities as they grow operations in Germany, Ireland, Brazil, Spain, the United Arab Emirates, and Finland. Most importantly, as a result of its virtually unrivaled global network of vehicle sellers, primarily insurance companies selling totaled vehicles but also the general public and entities such as banks and fleet operators, and vehicle buyers such as dismantlers, rebuilders, used vehicle dealers, and the general public, we believe Copart is very difficult to disrupt and in a great position to benefit from growth in global vehicle auction activity. Moreover, because network value rises exponentially as new participants join a network, we believe Copart is likely to maintain or even increase its pricing power over time.
CRE Brokerages & Outsourcers
Representative Example: CBRE
CBRE is a worldwide leader in commercial real estate services, an attractive industry since commercial real estate is one of the few industries shown to maintain its share of GDP over time. CBRE’s scale allows them to cost effectively provide local market insight and specialized expertise, utilizing premier technology tools and resources, thus often becoming the safe, one-stop shop of choice for many Fortune 500 companies to service their various commercial real estate needs. As a result of its virtually unrivaled global network of real estate buyers, sellers, and knowledgeable brokers, we believe CBRE is in a great position to benefit from growth in global commercial real estate activity. In fact, because two drivers of this growth, globalization and urbanization,9 will increase the value of large global real estate networks, we believe CBRE is likely to be able to grow both pricing and volume faster than its industry over time.
Online Advertising
Representative Example: Alphabet
Alphabet owns the largest search engine, video sharing platform, mobile operating system, and mapping service in the world, enabling it to capture an estimated 31% share of the global digital advertising market as of 2019.10 Excluding China, where Alphabet’s properties are essentially banned, Alphabet has a 41% global market share. As opposed to an absolute good where prices are driven down through innovation and competition, advertising is a relative good where businesses seek to outspend their competitors to maintain mind share. As such, the advertising industry is one of the few industries that has maintained its share of GDP over time. As a result of Alphabet’s virtually unrivaled network of users, publishers, and advertisers, we believe the company is in a great position to benefit from both growth in the global advertising market and the secular trend toward digital advertising, which currently only accounts for 50% of total spend. Moreover, because a) network value rises exponentially as new participants join a network and b) the company continues to invest heavily in emerging media platforms such as Waymo, we believe Alphabet is likely to maintain or even increase its pricing power over time.
Business/Tax/Cloud Software
Representative Example: Microsoft
Through Office, Windows, Azure, SQL Database Management System, LinkedIn, Github, and its numerous other products and services, many of which benefit from both network effects and high switching costs, Microsoft has cleverly positioned itself as a toll road over which nearly all businesses must pass. Furthermore, the company’s embrace of the open source movement in IT, its shift to a more subscription-and-cloud-based model, and the rapidly-expanding value of its growing network of services have all made this toll feel like much more of a win-win for customers. We believe this dynamic will allow for consistent price increases in its subscription renewals. Additionally, we believe Microsoft will continue to benefit both from long-term growth in global GDP as well as the continued migration of businesses to the cloud. Remarkably, despite its long runway for growth opportunities, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.
Travel Software & Internet Services
Representative Example: Booking
Booking is the largest online travel agent in the world. As a result of its virtually unrivaled global network of travelers and accommodation, airline, and rental car providers, we believe Booking is in a great position to benefit both from global GDP growth and from the secular trend toward more travel and tourism, which, pre-COVID-19, was forecast to grow as a percentage of GDP from 3.2% in 2018 to 3.5% by 2029.[11] While COVID-19 will significantly impact this forecast over the short and medium term, we believe the travel and tourism industry will continue to grow as percentage of GDP over the long term.
Concluding Thoughts
We hope this letter has given you both a more holistic view of your portfolio and an increased understanding of how we approach risk management. In a nutshell, our approach is to invest in businesses with enduring pricing power and long-term volume growth opportunities that we believe have a high probability of generating attractive long-term returns and then to build in numerous redundancies (such as financial conservatism and geographic diversification at both the business and portfolio level) and resiliencies (such as preferencing businesses with low cyclicality, high margins, and significant variable costs). By building in these redundancies and resiliencies, we believe we have materially reduced the probability and degree of permanent capital loss if we are wrong in our assessments of our businesses’ prospects. In times as uncertain as these, we gain tremendous comfort from these risk management measures. We hope you do as well.
As always, should you have any questions or need assistance, please do not hesitate to call or email us. Thank you for your continued trust and confidence in YCG, and we hope you have a wonderful summer!
Sincerely,
The YCG Team
Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security nor were they selected based on profitability. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not necessarily reflect current recommendations nor do they represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. A complete list of all securities recommended for the immediately preceding year is available upon request. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. S&P stands for Standard & Poor’s. All S&P data is provided “as is.” In no event, shall S&P, its affiliates or any S&P data provider have any liability of any kind in connection with the S&P data. MSCI stands for Morgan Stanley Capital International. All MSCI data is provided “as is.” In no event, shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data. Past performance is no guarantee of future results.
1 For information on the performance of our separate account composite strategies, please visit www.ycginvestments.com/performance. For information about your specific account performance, please contact us at (512) 505-2347 or email [email protected]. All returns are in USD unless otherwise stated.
2 See https://www.rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=299&year=1261.
3 See https://www.paymentscardsandmobile.com/unionpay-stays-on-top-as-the-worlds-largest-card-scheme/.
4 See page 6 of https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Global%20payments%20Expansive%20growth%20targeted%20opportunities/Global-payments-map-2018.ashx.
5 See https://www.standardandpoors.com/en_US/delegate/getPDF?articleId=2148688&type=COMMENTS&subType=REGULATORY. Given the duopolistic nature of the industry, we believe Standard & Poor’s pricing is a good proxy for Moody’s.
6 In 2012, for the first time in its history, Heineken decided to get its debt rated. Based on Heineken’s post-mortem analysis, getting its debt rated saved the company 30 to 50 basis points of yearly interest cost. See https://web.archive.org/web/20170713073100/http://treasurytoday.com/2013/02/do-companies-need-to-be-rated-to-issue-bonds.
7 See https://www.cnbc.com/2018/05/17/two-thirds-of-global-population-will-live-in-cities-by-2050-un-says.html.
8 See https://www.statista.com/statistics/727546/market-share-of-leading-banks-usa-domestic-deposits/.
9 See https://www.cnbc.com/2018/05/17/two-thirds-of-global-population-will-live-in-cities-by-2050-un-says.html.
10 See https://www.emarketer.com/content/global-digital-ad-spending-2019 and https://www.emarketer.com/content/china-digital-ad-spending-2019.
11 See page 7 of https://www.wttc.org/-/media/files/reports/economic-impact-research/regions-2019/world2019.pdf.
