Portfolio Manager Steven McBoyle explains the distinctive element in his analysis of company moats-the addition of a predictive framework.
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Steve Lipper: Many people analyze moats looking for companies with wide moats. What do you think is distinctive about our approach?
Steven McBoyle: Certainly moats are an overused term. Where we think we differentiate ourselves is effectively trying to look beyond the two-three-year period. A lot of this centers on not the fact that at a given point in time returns are attractive but rather are those returns going to be sustainable or grow?
So one effectively has to build in a mechanism or a framework that creates some sort of predictive value.
One of the frameworks that we’ve built is what we refer to as a “market map” and very simplistically, think of this as Porter’s Five Forces marries up with profit pool analysis. So we’ll go through the five forces, but most importantly what we’ll do is on this given market map, we will depict all the constituencies that are at play in this given market.
We will assign or depict the profit pool per constituency and we will track the rate of return in that profit pool. What that does amongst many things is create, effectively, a predictive value as to which areas of this market map are getting stronger versus getting weaker. At the end of the day, the primary objective to all this is who is going to wield the greatest amount of pricing power for the longest period of time.
That is a bit of the art of what we do. I think it is a differentiating feature as we analyze moats.
Article by Steven McBoyle, Royce Funds