There is always going to be risk. Risk is not a bad thing. It is how you actually will make your return, but you need to understand the level of it. You need to have a perspective that’s long enough and a time horizon that you’re not going to get caught out.
In a concentrated portfolio, you can spend more time on fewer companies. So we’re trying to know them better than average. We’re not trying to cover the waterfront. We’re trying to find those businesses we think can grow consistently, and then really try and understand them as best we can—which usually means going to visit them a lot. So I get on a plane and go and visit the management, whether it’s in Europe or in Asia or in the United States. And we don’t just do that on our own; we go with our analysts, so we can actually have a good debate and challenge with each other about what we really think this company is doing and what we really think it’s worth.
I can think of an Australian wine company we’re invested in at the moment. This is a business that I think we can own for many, many, many years. It’s got a great runway for growth. People are just consuming more wine consistently around the world, and the Australians are the world champions at the moment. They do about 26 liters of pure alcohol from wine per person per year, okay? In the US they’re a bit lightweight: they’re only at 11. The Chinese are only at four, but they’re starting to understand wine, they’re starting to get more involved.
They want to have a brand that they know, that they understand, that they’re familiar with. And every year they get the same quality at a good price. And if you can do that for them, you will be able to see that market go from four to five to 10 to 15 over the next 10, 15 years.
The other thing that really was good for us is knowing the CEO. He really sees wine, not as a sort of family business for the last 300 years with a château. He came from a fast-moving consumer goods background. He sees it as a consumer good. It’s all about the brand, it’s all about the pricing, it’s all about the consistency, and it’s about the distribution. And he completely transformed that business, and that for us was a very exciting thing. He was the catalyst for us to get involved. The runway for the growth of just the category looks really exciting, and it’s a very interesting business.
From our perspective, we’re trying to identify that business that grows consistently. The market tells you that most companies will see that growth fade over time, and then they don’t give you the benefit of the price. So if we find the ones that don’t fade, that’s where we get the upside potential, because the market hasn’t factored it in, and it turns out they’ve done better than expectations; and that’s where you get the outperformance.