Ask a European company’s finance director how long their shareholders stay, and the answer is usually measured in months. Trading is cheap, information is instant and many funds are judged every quarter. The result is a market that reacts sharply to news about the next six months and pays little attention to the next 10 years.
We think that is a durable advantage for an investor in Europe. If most money looks at the near term, patient capital faces less competition further out.
In practice, that means holding companies for a long time. Turnover in the European Quality Growth Strategy was 17% over the past year, which implies an average holding period of close to six years. Several companies have been in the portfolio since it launched in 2017.
One of them is a German maker of dosing pumps used in water treatment and chemical plants. When we bought it, it earned a return on capital of around 20% and had a long record of reinvesting in new products and markets. In 2022 its shares fell by more than 40% as interest rates rose and investors sold anything with a high valuation. Over the same period its revenue grew by 11% and its order book reached a record.
We did not sell. We added to the position twice in the autumn of 2022, because the business was doing what we had bought it to do and the price had moved in our favour. The shares have since recovered.
Patience has costs, and it would be dishonest to pretend otherwise. Quality growth companies are rarely cheap, and in years when markets favour banks, energy and other cyclical businesses, the strategy can trail the index for a long time. Holding through a 40% fall is uncomfortable for us and for our clients. We send a letter every quarter that explains, company by company, why we still hold what we hold.
Patience is also not inertia. We sell when a company’s returns start to fade, when management begins to buy growth through expensive acquisitions, or when the share price gets far ahead of what we think the business will earn. Last year we sold two holdings for the third reason. Both were good companies. Neither was a good investment at the price.
This article reflects the author’s views on the date of publication. It is not investment advice or a recommendation to buy or sell any security. Capital is at risk and past performance is not a guide to future returns.