What does it take to achieve extraordinary returns?
Three years ago we wrote an article called The One Percent in which we discussed the advantage of being able to cover a very wide opportunity set. It’s all very well getting the basics right in terms of stock analysis, but if your ability to apply that process is limited to 100 stocks, it really doesn’t help much. You’ll either be forced to invest everything in your best couple of ideas, forgoing diversification. Otherwise you’ll water down your process in order to diversify. Most investors, particularly professionals, will favor the latter.
Few investors, even professionals, are able to scale a good investment process consistently beyond a few hundred stocks. This is because a) their process doesn’t lend itself to scaling across different industries, countries, etc., b) they lack the resources to look beyond the major index constituents, c) their clients have limited their mandate to a specific subset of the global market, d) they are comfortable to limit themselves to names they’re familiar with, or e) they are unaware of the problem.
Further, most institutions that do have very wide coverage (investment banks for example) employ 100s of analysts across the globe with very little consistency. This means that they have no mechanism for consistently identifying their best ideas. They piece together various industry and country portfolios to arrive at one over-diversified global portfolio. They may as well run an index fund.
In order to achieve extraordinary results, we need to do something extraordinary, which requires – at a minimum – the following:
- A scalable process that can identify good businesses trading at good prices;
- The ability to apply this process consistently to a very broad opportunity set. The wider the opportunity set, the better the potential portfolio;
- The desire and the intestinal fortitude to select only a portfolio of best ideas, even if it looks nothing like the benchmark index.
Note that 2 of the 3 won’t cut it. A great process applied to a wide opportunity set, but then over-diversified or constrained by benchmarks won’t result in extraordinary returns. Going with your best ideas won’t help much if they aren’t any good. And you won’t find too many great ideas if you can’t sufficiently cover the global opportunity set.
How do we stack up?
At Bellwood we aim to tick all 3 boxes. We are relentlessly focused on process and we have very wide coverage of the global stock market. We’re continuously developing our capabilities on both fronts. Finally, our active share is ~95%, demonstrating our commitment to building best ideas portfolios.
Some examples of the fruits that have been borne by this process since 2018 include: Kakaku.com, Evolution Gaming, NetEnt, IGG, XD, Thule, Systena, Challenger, Banco Santander Chile, Mexican airports, and Silicon Motion. These have contributed substantially to our returns, especially over the last year. You won’t find these stocks featuring in many other portfolios.
Going forward we’ll keep searching for investment ideas like these, and we’ll keep building portfolios that reflect our conviction in this process, which is anything but ordinary.