There are two big growth managers based in Paris that begin with the letter ‘C’. One has quadrupled its staff since 2003 and quadrupled its assets under management since 2008, lavishly entertains an army of IFAs at its annual investor conference, and enjoys high-profile advertising and commenting in the press across Europe. The other is Comgest.
Comgest has doubled its staff since 2005, but its portfolio managers still boast an average of 19 years’ industry experience. Remarkably, while some have retired and others have left to be full-time parents, not one has abandoned the firm for a competitor. Why do they stick around for so long? They all own shares and the organisational structure seems to be genuinely flat. But managing money at Comgest also requires a lot of patience.
“Our clients know that we haven’t changed what we do for 25 years,” says Céline Piquemal-Prade, lead manager for global funds.
What it does is maintain 11 ‘quality GARP’ strategies - seven regional (global, Asia, Asia ex-Japan, Asia Pacific-ex Japan, global emerging markets, Latin America, pan-European) and four country (greater China, India, Japan, US) - based on concentrated portfolios of 30-40 stocks, chosen from a universe of as few as 50-75 per region and held for an average of 3-5 years. Each Comgest analyst covers about a dozen companies over a period of a decade or more. This is not for the easily-distracted.
‘Quality GARP’ means an unconstrained approach to buying highly visible double-digit earnings growth, above-average margins and 6-10% free cash flow yield from well-managed, non-cyclical ‘franchises’ wielding pricing power in industries with high barriers to entry, supported by long-term trends. This has been the pattern since 1986, when founders Jean-François Canton and Wedig von Gaudecker left Banque Indosuez and Paribas to apply what they admired in Warren Buffett’s investing style to European and Asian markets.
“We are not going to be looking for biotech companies that are generating negative free cash flow trying to launch the next blockbuster, or early-stage tech,” says Piquemal-Prade. “We buy when a franchise is proven.”
This is another reason for patience: these gems are overvalued more often than not, and it can take years for them to reach Comgest’s price thresholds.
“This is why we are not benchmarked - it’s the only way to be truly opportunistic,” says Piquemal-Prade. “Of course, 2008-09 was a once-in-a-lifetime opportunity to buy companies like Google, Alcon Labs, some emerging consumer names like ITC. But company-specific events and market trends - it can suddenly become unfashionable to be in emerging markets, as we have seen recently, for example - also enable us to build positions for the long term.”
Right now, Japan exemplifies this philosophy. Comgest is one of few overseas asset managers with an agreement to sell its products in Japan, which it sees as a big potential market. “It’s a perfect example of our contrarian, long-term approach,” says investment specialist William Holmberg.
The dreadful crises that hit Japan in March will not deflect this strategy. While Comgest acknowledges the new debates around energy policy and ‘just-in-time’ production models, it takes comfort in the fact its core global franchises take the bulk of their revenues from outside Japan, looks forward to a consumption rebound for its holdings in firms like Fast Retailing, and notes the benefits of the reconstruction efforts that will flow to building materials firms like Sekisui Chemical and Kuraray, and airconditioning specialist Daikin Industries.
Indeed, the fact that Comgest holds companies in the beaten-up sectors of a beaten-up economy shows how a concentrated focus can work against the tallest odds. “Of course, the macro environment is tough in Japan and I’m not going to try to tell you that there is overwhelming growth there,” concedes Piquemal-Prade. “But you can find growth through consolidation even in a totally depressed economy. We’ve had exposure to the electronics retail space, which has benefited from the massive consolidation in that sector over the past 20 years; we have Sugi Holdings, which is benefiting from drugstore consolidation. We are not benchmarked, so there is no reason to be exposed to the market as a whole.”
Concentrated portfolios enable Comgest to apply the same stockpicking process to each of its markets, and to allow new stocks into its universe only after unanimous agreement from every portfolio manager. Concentration removes market noise. As Piquemal-Prade puts it: “A good franchise looks similar whether it is in the US, Germany or Japan; consumer staples, agriculture, healthcare or technology.”
Regional differences are only really noticeable by the fact that some telecoms, utilities and financial stocks can be found in emerging markets portfolios, but not developed market portfolios.
“A company like China Life or an emerging market retail bank is a consumer growth investment rather than a financial,” says Piquemal-Prade. “We like simple business models where we can understand where revenue growth and margin expansion is likely to come from. In developed markets we simply do not have that in the financials sector.”
Similar arguments underpin the low weighting to materials - and the exceptions to the rule. Comgest wants to avoid macro bets on commodity prices and generally is not convinced that mining and energy companies have real pricing power. But it holds stocks like Australian drilling services company Boart Longyear for its 35% global market share. Similarly, in 2004 and 2007 Comgest bought exposure to Asian and US oil services companies: 20 years of under-investment and a decade of consolidation had left companies like Schlumberger with 35-40% share in some niche markets. The way Comgest exited is interesting, too.
“In 2008 I spent some time with Baker Hughes, and they told me that competition had gone up - engineers had been leaving the likes of Schlumberger and Baker Hughes to set up on their own - and demand was starting to plateau,” Piquemal-Prade recalls. “That’s when we sold all our oil services stocks, and even after the market correction we have not returned.”
This sell discipline is important to such a self-consciously long-term strategy - it differentiates the conservative investor from the fall guys who are simply behind the curve. Similar assurance that Comgest’s patience is not just quietism can be taken from its two more unusual portfolios - Emerging Markets Promising Companies and Greater European Opportunities - which both seek out “companies that could potentially become leading franchises within the next five years”, as Holmberg puts it.
It is not about to start punting on early-stage biotech (or spending on glitzy PR), but with five-year returns comfortably in excess of benchmarks despite the dash-for-trash of the past two years, Comgest already knows how to make ‘quality GARP’ sexy - despite itself.