Die investors Brian Yacktman and Elliott Savage have had a challenging time. Your YCG Enhanced Fund has recently underperformed its index by almost three percentage points. Nevertheless, they did not panic and trusted in their strategy.
This trust was rewarded because, according to Kiplinger, the Fonds by Yacktman and Savage since the beginning of the year top one percent in its category and is the large-cap fund with the 8th best performance over the past 12 months. According to Morningstar analysts, the fund is still in the top four percent over the past five years.
Higher interest rates were a key reason for the YCG Enhanced Fund’s underperformance in 2022 as it focuses on high-growth stocks whose future earnings are a long way off. Even if interest rates have not fallen this year, market prices suggest that there is a light at the end of the tunnel for rate hikes.
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“When interest rates go up very quickly, there’s pressure on interest rates,” Yacktman told Business Insider in mid-May. “It’s like a reset button. It’s hard, but once you did that reset – which happened to us last year – these companies proved, ‘Hey, we can swim against it.’”
How to find long-term growth stocks
What differentiates Yacktman and Savage is not their goal, but how they achieve it.
“We’re trying to identify companies that have the ability to raise capital with high returns over very long periods of time,” Yacktman said. “And I know that sounds so simple because that’s sort of the key to investing. You want high returns. But the problem is that this competition and innovation is growing all the time around the world – it’s driving down investor returns incessantly.”
Ironically, companies’ profit margins could suffer because of the innovations they’ve been working to develop, Yacktman said. Because technology is a deflationary force, it can lower prices and even profitability. Manufacturers of TV sets can confirm this, because despite dramatic improvements in quality, prices have fallen sharply for decades. To withstand this dynamic, companies must have pricing power.
“If a virtually identical competitor came along and your company was able to charge a high premium compared to that competitor and still grow volume, then I know you’ve got a good deal,” Yacktman said.
According to Savage, there are two key requirements for pricing power: a presence in an industry that is viable over the long term, and a global reach that allows a company to currently charge its customers a higher premium for their goods or services. In other words, companies can pass on costs when they sell a need, not a want, and when their offer is better than that of their competitors.
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Companies fitting this description have been described by fund managers as ‘toll collectors’ for global wealth. Just like the tollbooths, these companies can collect fees from their customers consistently and without much resistance.
Once Yacktman and Savage find companies with growth and pricing power, they scrutinize valuations closely. Just because a company is valuable doesn’t mean his is too Shares are valuable, they say.
Many growth-oriented investors have learned the hard way over the past few years that paying for growth at any price is a mistake. Those who don’t look at a company’s price-to-earnings ratio, examine a discounted cash flow model, or consider the expected rate of return relative to its peers may regret it.
“There’s a tendency for people who want to get rich quick to consistently overvalue the companies that they think will bring that quick return,” Yacktman said.
The fund manager notes that the reverse is also true: “This get-rich-quick desire tends to result in a systematic undervaluation of companies that deliver high and sustainable total returns.”
14 top stocks to buy right nowt
Investors looking for seemingly “boring” stocks with steady growth, pricing power, and reasonable valuations are in luck. Yacktman and Savage shared 14 stocks they like and believe will be profitable over the long term.
The fund managers include stocks from Mastercard and Visa, who function very much like toll collectors in global payment transactions. The technology giants Microsoft and Amazonwhich its at the end of the first quarter two largest holdings cloud computing is enabling it to be “digital railroads” in the global information infrastructure, Savage said. And their competitors Alphabet and Meta control the online advertising market.
Leading global brands like Apple, Estee Lauder and Nike act as tax collectors for global wealth, Savage said. He added that luxury companies like Hermes, LVMH and Ferrari have tremendous pricing power because they sell commodities, which are products for which demand increases with prices.