Strategically Speaking: Comgest
There is something disconcerting about Arnaud Cosserat, but it is not immediately clear what. It is not that he says anything outlandish. On the contrary, he seems charming and measured in his pronouncements.
Then it becomes clear. Many fund management chiefs are anxious to emphasise how they are transforming their business. They are eschewing their old model for something fundamentally different. Rather than resist the forces of disruption, they are proud to be embracing them.
Cosserat, in contrast, is keen to stress how little has changed at Comgest since it was founded in the mid-1980s. Sure, it has grown substantially since then in terms of assets under management, staff numbers and international network, but its basic approach is the same as three decades ago.
The group’s two pioneers, Jean-François Canton (formerly of Banque Indosuez) and Wedig von Gaudecker (previously at Paribas), were both influenced by the long-term investment style of Warren Buffett. Although the day-to-day running of the group has passed to a new generation – led by Cosserat – the influence of the founders lives on. In addition to their long-term approach, they retain small stakes in the company and sit on its supervisory board. Vincent Strauss, who recently retired as chief executive, also sits on the board.
“We are investing in a very concentrated and long-term manner,” Cosserat says. “We put a lot of emphasis on the products and the quality of the research because we think it’s what differentiates us.”
To illustrate his point, he says the average time it holds a particular equity in its European or emerging market portfolios is five and a half years. This compares with an average duration in Europe of less than a year and in the US of four to five months.
“When we invest it’s always for the next five years,” he says, adding an additional “always” for emphasis after a short pause. Many stocks are held for 10, 15 or even 20 years.
As an example of the group’s continuity of holdings he points to Dassault Systèmes, a company that produces specialist 3D design software. Shortly after Cosserat joined the group in 1996 he met the company’s chief executive. Twenty years later, with Cosserat still retaining a fund management role, he has just met his counterpart again.
Another illustration of the group’s selectivity is its deliberately narrow focus within a universe of about 6,000 stocks across Europe. The company maintains a watch list of 200 companies but is only looking in detail at 80 companies while investing in 30.
He says that in the last 20 years it has invested in only about 120 Europe companies. That means an average of five or six new ideas per year of which perhaps two will turn out not to be right. Cosserat describes the process as “very Darwinian”.
In his view it would have been hard to pursue Comgest’s investment style if it had been a subsidiary of a larger group. “It’s very difficult to carry out an unconstrained, highly active strategy when you are in a big bank or a big insurance company,” he says. “There is a pressure for immediate results.”
In contrast, Comgest exists as a partnership of current and former employees. Typically employees are invited to buy shares after two years of employment. At present it has about 130 employees, and three-quarters are shareholders.
That means it can deviate from standard industry performance metrics. “We know that we can be away from the benchmark,” he says. “That’s a price to pay if you are long term.”
Indeed, Comgest is likely to underperform when the market is moving upwards strongly. That is because poor-quality companies often do well in such conditions. Of course, the rationale, which seems to be borne out in practice, is that higher-quality stocks tend to outperform in the longer term.
However, although equity markets may not have changed fundamentally over the past 30 years there are others aspects of finance that have evolved. In particular, environmental, social and governance (ESG) has become mainstream. As Cosserat acknowledges “there is a tsunami of ESG demand”.
It is easy to forget how much things have changed in that respect over the years. Not only had the abbreviation not been coined back in the 1980s but the concept would have seemed odd to market participants. The assumption was that asset managers had a fiduciary duty to maximise returns for a given level of risk. Ethical funds, as they tended to be known at the time, were seen as specialist vehicles for those with strong moral convictions. Typically they would avoid areas that were seen as morally dubious such as arms manufacturers or tobacco.
Clearly an enormous amount has changed since. It is now accepted that investors are breaching their fiduciary duty if they do not take ESG factors into account. That is the reversal of the previous assumption. What was once considered ethical investment has become mainstream. In addition, the moral focus has widened to include other factors, climate change in particular.
Under such circumstances, it is not surprising that Comgest should see the ESG focus as fitting into its long-term approach. Although it may not have used the term in its earlier days it sees its concern as “sustainable” long-term investing.
For example, it has long focused on other factors in addition to the standard report and accounts. That can include an examination of how a firm behaves towards clients and suppliers as well as contact with the company’s human resources department. “There are a lot of extra things, soft factors, that people find difficult to understand,” Cosserat says.
As an example of engagement, he points to its relationship with two of its key holdings: Inditex (the Spanish clothing firm that owns Zara) and H&M. Both fashion retailers are involved in the Sustainable Apparel Initiative designed to ensure their suppliers conform to high ESG standards.
It is, of course, inevitable that the world has moved on in some respects but Comgest makes a strong case that, in essence at least, its approach has remained steady over time. The last time IPE looked at Comgest back in 2011, the story’s headline was “we haven’t changed for 25 years”.
Five years later, it can make a reasonable claim that it has not changed for 30 years. Perhaps it should be revisited in 2021 to see if things have changed.