I take Warren Buffett's view that companies will always make errors. It comes from his line about how you want to be invested in businesses that can be run by idiots because one day they will be. We focus on high-quality stocks with proven long-term growth strategies. You can't have any insights into short-term performance. You can only really generate insight that captures excess returns by doing the research and finding the advantages a company has that will pay out over many years or even decades. Our worldview is that it'll be a tough slog. In the developed world, we've barely begun de-leveraging. Companies are relatively well positioned if they have strong balance sheets and good emerging-markets exposure, which will be a big part of top-line growth.
The Stats: Staying largely out of bank stocks hurt Hallett in the mid- to late '00s, but over the past five years his $554 million fund has returned an annualized 6 percent, vs. 2.7 percent for its benchmark index.
Hallett on his plays:
Nestlé (NSRGY) is never a short-term star in the markets, but over 20 years the stock has returned an annualized 14.7 percent in U.S. dollars, including reinvesting of dividends. It has a long history of spending a lot on research and development, and can be quite inventive. And it has a history of extending brands in ways that please customers. Nestlé surfed the coffee wave by developing packaging systems like Nespresso. At 54, it's about 30 percent below our fair value estimate.
Any large global consumer company will be looking to emerging markets for growth. LVMH (LVMUY) has a very high share of luxury goods in markets like China, where sales of high-priced brands have been growing very rapidly. It's also very big in Japan, and in India it has grown its watch and jewelry segment to 10 to 12 percent of market share. Watches are its most recent new category, and its most recent new market is Brazil, where it purchased an online fragrance retailer.
3. Air Liquide
I believe in the vibrancy of capitalism, where high returns tend to get competed away. It's a company's competitive structure that protects high margins against competition. The industrial gas industry is thoroughly dominated by four companies, including France's Air Liquide (AIQUY). So you have bargaining power over suppliers and can raise prices if your costs rise. The business tends to grow at 1.5 times gross domestic product. Air Liquide has had remarkably steady growth.
We're investing in companies that will benefit from aging populations. We own Unicharm (UNCHY), a Japanese company that makes products like adult and infant diapers. Adult diapers have high margins and sales have grown in Japan as well as in other developed countries, where the potential is large. Unicharm is also heavily exposed to China. The company has not only survived the deflationary market in Japan—where the price of a diaper is as low as it is in China—but also managed to sustain high margins.