Aristotle Capital Management annual letter for the year ended December 31, 2015; titled, “Focus In The Midst Of Uncertainty.”
To Our Clients:
The year 2015 was one of volatility in the global markets. This included extreme moves in currencies and commodity prices; political changes in countries such as Greece, Spain, France and Argentina; and a series of global terrorist attacks. Yet, with all these “shocks,” most global indices finished the year within a few percentage points of where they began.
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At Aristotle, assets under management grew by 3.1% to $10.9 billion1 and our investment strategies generally outperformed their benchmarks. While the global macroeconomic events outlined above impacted markets in the short term, we continue to focus on owning what we believe to be high-quality businesses over the long run. We specifically seek out companies that can be nimble across the global economy and sustain competitive advantages through economic cycles. We favor companies we believe have the ability to adapt to changing environments or customer preferences and have a degree of predictability. The businesses we invest in must also deliver a high return on capital employed (ROCE). We define ROCE as earnings before interest and taxes (EBIT) divided by total debt plus shareholder equity. That is, we believe that higher quality companies generate higher earnings relative to the capital employed in their businesses.
Aristotle Capital Management Remains Focused On Long-term Fundamentals
As the 2016 presidential election in the United States heats up, we are reminded how “noise” can affect the markets in the short term. This year’s election is certainly shaping up to be good theater and will likely impact the markets in coming months, with short-term ups and downs occurring depending on the news of the day. While the ultimate choice of President of the United States may have a longer-term impact on global economics, we stay focused on what we can analyze fundamentally—individual businesses. As world leaders change, such as the 2012 election of Shinz? Abe in Japan, their policies may impact the economy, individual businesses and industries over time. As information becomes known and is relevant to businesses in which we have an interest, we factor it into our analysis.
Listed below are a few companies that met our equity strategies’ rigorous requirements for investment in 2015:
- Archer Daniels Midland Company (ADM), one of the world’s largest integrated agricultural service companies in a consolidating industry, continues to transform and adapt to an ever-changing global agricultural landscape. In the process, we believe ADM is becoming a more foreseeable, more value-added player in a somewhat cyclical industry.
- Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), a global banking service provider, is another company that satisfied all three requisite criteria for investment: quality business, attractive valuation and catalysts—specifically, increased market penetration in Mexico, Turkey and the United States.
- National Fuel Gas Company (NFG) has been on our watch list for three years. It is a well-run integrated energy company that has amassed a 112-year record of consecutive dividend payouts and 44 years of consecutive dividend increases. We believe NFG’s integrated structure is powerful and unique; however, without the application of deep industry knowledge, it can be misunderstood and overlooked by the market. The discount to perceived value creates upside potential for Aristotle.
A disciplined investment process encompasses a disciplined selling strategy.
The positions we exited this year were analyzed in the same light as our new investments—what are the external influences and internal factors that will continue to create long-term value.
- Ecolab, Inc. (ECL), a global cleaning and sanitation products and service provider, had achieved much of the value we saw in 2012 and is now widely recognized by the market, thereby closing the value gap we seek in investments.
- TE Connectivity Ltd. (TEL) solves complex connectivity problems for its customers and has been a strong contributor to performance over our five-year holding period by largely fulfilling the promise of several catalysts we identified. We believe that, while currently fully valued, the company is still fundamentally strong and we will continue to follow it, looking for future opportunity.
- Baxalta, Inc. (BXTL) shares were received as a spin-off from our holdings in Baxter International Inc. After thorough review, we decided that Baxter’s more stable, yet steadily growing, businesses more closely aligned with our investment strategy, so we exited the spin-off and used the proceeds to add to our position in Baxter.
News From The East Coast - Aristotle Boston
In last year’s letter, we announced the addition of Aristotle Capital Boston, LLC (Aristotle Boston), a new affiliate that expanded our equity investment platform. The investment team, led by Dave Adams and Jack McPherson, has allowed us to add the Small Cap Equity and Small/Mid Cap Equity strategies to our strategy offerings.
The Aristotle Boston team was the beneficiary of a number of new equity mandates during 2015. We were also fortunate to have Will Averill join us in June, in the Boston office, as Director of Institutional Sales. Will came to us from Loomis, Sayles & Company and has deep relationships in the institutional and consultant community that we hope will help raise our visibility on the East Coast and extend our national presence.
Our Unwavering Commitment And Pledge To The Aristotle Philosophy
Over the past decades, we have built a team that embraces and lives by the Aristotle philosophy. All Aristotle employees commit to the meaning of the name Aristotle–Best Purpose. In other words, we strive to be the best in everything that we do.
This philosophy is embodied in the Aristotle tenets below and is what each and every one of us commits to each day:
Aristotle Is Committed To Its Clients Above All Else
Our first and primary responsibility is to you, our clients. With the highest level of integrity and commitment, we must always put our clients first in everything that we do. This is the foundation for our success.
Employees Shall Have The Benefit Of The Best “Total Working Environment”
Employees and partners are part of the Aristotle family that grows and prospers together. We foster mutual respect and support across all employees and partners, such that all can be proud to be part of the team.
Aristotle Strives To Enhance The Environment In Which It Resides
We strive to improve and enhance our community as a result of our actions. We commit time, talent and resources to give back to our local communities.
Aristotle Partners Expect and Deserve A Strong Return on Their Investment
Through strong leadership and adherence to the other tenets, Aristotle will strive to deliver attractive long-term return on investment to its partners.
We Are Focused On The "Years" Ahead
Of course, we do not have a crystal ball to predict the timing, magnitude or direction of what might be a new set of challenges in this year, or the next. Rather, we remain focused on what we believe to be high-quality businesses that can bridge various economic environments and outperform the market and their peers over the long run.
Thank you for your confidence and trust. We continue to work hard every day to uphold our commitment to you, and we are grateful for your partnership.
Co-CEO and Co-Chief Investment Officer