Mawer Funds Commentary: Avoiding the Group of Death

By Institutional Portfolio Manager Rob Campbell

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Holly LaFon
Sep 30, 2019
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In our third podcast episode, Moneyball and automation: introducing “The Lab,” Justin Anderson gave us two keys to winning at poker:

  1. You have to play fundamentally sound poker—i.e., pre-flop, you shouldn’t be folding aces or going all-in with deuce-seven.
  2. You need to know who is playing at your table.

While the first key is fairly obvious, the second is often underappreciated. The strength of your competition has an important bearing on your own odds of success. If the other players at your table are all amateurs, you are more likely to win than if you’re sitting with a bunch of sharks.

This idea doesn’t just apply to poker. In 2015, England crashed out of the Rugby World Cup in the pool stages, failing to qualify for the quarter-finals. As they were ranked 4th in the world coming into the tournament—not to mention the host nation—it was a national disaster.

Many reasons have been attributed to England’s failure and their coach resigned in the aftermath. But perhaps the most important explanation had nothing to do with the English team: England had been drawn into the “Group of Death” alongside Australia (ranked #2 in the world at the time) and Wales (#5), where only two of the three could qualify for the quarter-finals. No matter which two teams had advanced to the knock-out stages, somebody’s fan-base was always going to be bitterly disappointed due to the competitive dynamics within that pool.

Competitive dynamics in investing

The concept of knowing who is at your table or the strength of your pool is important to us as investors when analyzing companies. Our investment approach starts with a scrutiny of business models and their sustainable competitive advantages where much of the analysis is intrinsic to the companies themselves. In other words, what is it about a particular company that should allow it to earn a return on capital greater than its cost of capital over time? The answer could be a unique product, a strong brand, a technological advantage, or exclusive access to a scarce resource.

But competitive dynamics also matter, and this includes an understanding of the industry—or the pool of players—in which a company competes.

Consider banks in Europe. They inhabit a notably crowded space without a clear market leader where the persistently low interest rate environment has put pressure on their lending margins. In an effort to drive profitability and exacerbated by fierce competition, they have been forced to make increasingly aggressive loans. These competitive dynamics don’t tend to support sustainable wealth-creation and are key reasons we’ve generally shied away.

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