Our philosophy is to invest in core companies in core countries. While the growth outlook looks anaemic in many European countries, we are very selective as to whom, in which industry, and in which country we lend our investors’ capital.
Peripheral European countries such as Greece, Spain and Portugal continue to be dogged by a variety of factors including vast debt piles and little to no sign of growth. Sovereign debt restructuring is likely on the cards for a number of European peripheral economies at some stage in the future, while political instability in these countries remains a key concern.
Given the challenging conditions in peripheral Europe, we prefer to focus our lending on the core countries of the UK, Germany, the Netherlands and Switzerland — as well as the US. Within these countries we believe that triple-B, double-B, and selected non-cyclical single-B rated names are the sweet spot where one can expect reasonable yields (returns) without excessive risk.
Thematic clusters in our portfolios
In our favoured universe, we tend to lend to large defensive names that generally have good pricing power and/or operate within well-established/consolidated industries. A few of our inherent themes are explored below.
Oligopolistic triple-play wireline providers
Triple-play providers are cable TV companies that offer and sell telephone, internet broadband, and TV to their customers. Three players in the UK: Virgin Media, British Sky Broadcasting and British Telecom, provide services for an expanding market in need of ever increasing data capacity and faster internet connections. Each is well-established in its niche only competing with others on packaging and services. Thus their pricing power is less likely to be eroded while the demand for their services grows steadily.
This pattern is repeated in the Swiss telecom market. Switzerland is a very stable market with a high gross domestic product (GDP) per capita. The three major players in its telecom market do not compete on price and tend to have loyal customers, ensuring the sustainability of their businesses.
Duopolistic roadside assistance in the UK
In the UK, a near duopoly exists with regard to car breakdown services with the AA and the RAC at the head of the pack. Both are very strong, well-established brands who tend to have loyal customers; motorists trust these organisations while not being particularly price sensitive as their services cost only a few pounds a month. Over the years both have achieved national coverage and economies of scale — the high start-up costs of these businesses act as a barrier to entry for other companies. Additionally a very high percentage of their revenues are assured from repeat business by existing customers.
Gaming and cinemas — UK and US
The UK gaming industry is stable and displays competitive dynamics. According to a recent research report the sector has grown despite difficult economic conditions, by a compound annual rate of 4% in the last five years. Moreover, the sector is expected to continue to benefit from the increasing prevalence of mobile and online gaming.
The cinema industry is another sector that tends to be resilient to economic downturns, being an affordable leisure activity. Since 1935, apart from a peak period after WWII and a trough in the 1980s, cinema attendance in the UK has risen steadily with a total of 172.4m admissions in 2012, equivalent to 2.7 visits per person. In the same year cinema attendance rose by 6% in the US and Canada, with 57% of the tickets sold to frequent moviegoers who visit the cinema once a month or more. The theme of recurring, reliable revenues resonates here.
The corollary of our thematic approach is that we shy away from companies operating in unconsolidated industries; overly invested with little to no pricing power; cyclical in nature, and in structural decline. We have a saying on the desk: if it rolls, floats or flies don’t lend it money. Hence we stay shy of autos, shipping and airlines because of the huge overcapacity in these sectors. Another cardinal rule on the desk is to maintain a safe distance from the three ‘Rs’: retailing, restaurants and the rag trade (clothing).