Burgundy’s November conference call is becoming something of a pre-holiday tradition. This year’s call featured an update from Richard Rooney, our President and Chief Investment Officer, and comments from Chief Operating Officer Robert Sankey, and Chairman and Chief Executive Officer Tony Arrell.
The call addressed a wide range of topics, but throughout, Richard, Rob and Tony emphasized several key messages rooted in Burgundy’s quality-value investment philosophy.
The most fundamental point that came through on the call was Burgundy’s commitment to investing in high-quality companies. These are companies with competitive advantages (e.g., strong brands), strong balance sheets (low levels of debt), and consistently high returns on the capital that they employ. We believe that over time, quality businesses will grow in intrinsic value – so that, regardless of the short-term ups and downs of the stock market, they are likely to be worth more in five or ten years than they are today. As Richard put it, we believe that owning quality companies is one of the most certain ways to generate wealth in the long term, although it can be one of the least certain in the short term.
The call also delivered a key message regarding this potential for markets to generate short-term volatility: the important thing is not to try to forecast market volatility, but to be prepared for it, whenever it arrives. Richard, Rob and Tony laid out a two-part strategy for protecting capital. For long-term capital, they recommend investing in quality companies that we believe have a high probability of being worth more in five or ten years, regardless of shorter-term market fluctuations. For shorter-term capital – in other words, savings that investors might need to draw on for spending in one to five years – they recommend setting aside cash and bonds. This way, investors have short-term resources to draw upon whatever stock markets are doing, and can view market volatility as an opportunity to buy good businesses more cheaply, rather than as a threat to their financial well-being.
The call also addressed Burgundy’s investment performance relative to the broad stock market indices. As Tony pointed out, on an absolute basis, returns for the past year have been quite good by historical standards, but in a number of regions Burgundy portfolios have not kept up with the exceptional returns that the broad markets have delivered. Richard highlighted some of the reasons for this. Foremost among these was that this year’s strong returns for the averages have been driven to a large extent by stocks that we consider to be either lower quality (e.g., big balance-sheet financials such as large banks in the U.S. and Europe) or highly valued (e.g., large-cap technology). Richard went into some detail on the so-called “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google/Alphabet), which have accounted for 40% of the S&P 500’s gains in the year to date. Collectively, the stock market value of these companies is enormous – nearly US$2.8 trillion or approximately 15% of U.S. GDP. However, their profits amount to only US$92 billion, 0.5% of U.S. GDP, with half of that profit coming from the one company in the group, Apple. We view these as impressive and disruptive companies, some of which are in our portfolio and others on our “Dream Team” because we consider them too expensive given what we estimate to be their long-term profitability.
Richard, Rob and Tony addressed a number of other specific topics, such as currency, interest rates, and the energy sector. Overall though, the most important point of the call was the core message that at Burgundy, we remain committed to our philosophy of investing in quality companies for the long term, and that it is precisely because of today’s high valuations and uncertainty that we must stick to the discipline that we believe will protect and grow capital for the long term.
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints, or financial needs. Under no circumstances does this post suggest that you should make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and are subject to change without notice.
Article by Philip Doyle, Burgundy Blog