The importance of people
When asked what is the first parameter employed when sifting the wheat from the chaff, Russo speaks of the people factor. Very influenced by Warren Buffett (You can’t make a good deal with a bad person), he is driven by a strong sense of integrity and stresses on corporate culture, business integrity and management integrity. Henry Kravis’ aphorism on integrity (If you don’t have integrity, you have nothing) aptly describes Russo’s investing style.
He believes that if a company is run by a CEO who's reporting dishonestly or stealing from shareholders, the company is not worth backing. In other words, agency costs top the list of qualifying criteria.
(According to Investopedia, agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.”)
He has often stated that if he is going to hold a stock for years, it is very important that he first establishes whether the culture has the right values as it relates to their willingness to reinvest, their ability to reinvest and for whom they reinvest. Corporate culture and agency cost loom large in his first cut of the company.
In an interaction with Beyond Proxy, he stated: If I found on that first test that there was something about the management that left me feeling it was opportunistic or short term driven I probably won’t embark on the analysis that follows. Threshold screening would be caliber of owners and then the management that follows.
This is a fundamental reason he gravitates towards family controlled companies or those where the founding families still retain control and significant investment exposure. He believes that such companies are uniquely positioned to bear burdens on reported profits in pursuit of long-term gains. They can align shareholder interests more closely than companies that have no personal family input underway.
The importance of going global
Even when it was not fashionable, he was a “global investor”. In an interview with Value Buddies, he claimed that his decision to look abroad in his hunt for value has made all the difference in his career. From the early 1980s, he has tapped into businesses that have had the capacity to reinvest abroad. This he believes has been a huge part of his success.
He once compared Kraft with Nestle, the latter being his top investment for many years. Kraft suffered a lot due to the domestic nature of its business. Nestle, on the other hand, has a share of the consumer’s mindset in over 100 markets around the world. The company has the capacity to reinvest money around the world and in an accelerated fashion because the world is growing in its consumer disposable income.
Little wonder that his portfolio over the years has held businesses and brands such as Nestle, Unilever, Mastercard, Philip Morris International, Richemont (a Swiss company that has global brands such as Cartier and Dunhill), Heineken, SABMiller, Google and Pernod Ricard. Shareholders benefit from the goodwill these brands enjoy across the world due to the rise of consumerism and opening up of emerging markets.
It is obvious that Russo lays great emphasis on the power of a brand. A strong brand commands price elasticity and drives recurring revenue and high return on capital, and reduces the risk of the business model. Price elastic demand is crucial because loyal consumers will be willing pay a higher price should inflation drive up ingredient cost and the company needs to maintain its margin through higher prices.
In an interview, he cited this example to drive home his point. He and a colleague had boarded a flight and his colleague ordered a Jack Daniel’s, a brand of whiskey. The steward informed him that they only had Jim Beam, another brand of whiskey. His colleague replies: “No thanks, I would rather have water.” Russo argued that if the steward came back and said “Yes, you can have Jack for a dollar more than Jim Beam”, he colleague would not have minded. That is what he meant about brand loyalty possessing pricing power.
To sum up, his philosophy is to invest in businesses that have a strong brand with the capacity to reinvest. Honest management is given priority with a special penchant for family controlled companies. Such holdings can really compound over time. It has worked for him. A partner at Gardner Russo & Gardner, which has over $5 billion in assets under management, Russo oversees $4 billion of the firm’s Semper Vic Partners fund. The firm outperformed the S&P 500 index by an average of 4.7% annually from 1984 to 2011 while the Semper Vic fund returned 14.6% annually after fees and expenses.
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