27
Sep
2019

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It pays to pick the right industry

Peter Lynch, the legendary investor, once quipped that it’s best to invest in businesses that any idiot could run, because sooner or later one will. This begs the question of what drives the economic returns of businesses: is it the competitive forces of that industry or the skill of management? It’s likely a combination of both.

The following graph looks at the distribution of value creation for a range of industries. The blue bars are measuring the spread between the cash flow return on investment (CFROI) and the cost of capital for 68 global industries as defined by MSCI’s GICS system. The data was taken from a sample of 5,500 public companies. The smaller graphs focus on the value creation (or value destruction) for companies within a specific industry.

27092019_Chart_1

Source: Credit Suisse HOLT

What we can observe is that on average some industries create business value, and others destroy business value. However, we can see that within any given industry there are firms creating value, and others destroying value. What this means is that even the industries that on average create the most business value contain firms that actually destroy value.

However, there are certain industries where the economics are so challenging that there is little a good management team can do to generate positive economic value. To quote Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Take the airline industry for example. The International Air Transport Association estimated that over the 2002-09 business cycle, the airline industry destroyed an average of $19 billion of shareholder capital per annum. Intense competition, high capital expenditures to purchase aircraft, volatile input cost prices (i.e. oil prices) combine to create an industry that has historically struggled to generate positive economic value. While there are players within the airline industry such as travel agents and freight forwarders that generated positive economic value, it was insufficient to offset the value destruction from the airlines.

At Montaka Global we seek to find businesses that are both cheap, and able to reap an outsized share of the industry economics. It is these investments that we believe are likely to have a greater likelihood of performing well for our investors over time.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Alpha Plus Fund

  • GLOBAL
  • A market neutral strategy
  • From $50,000
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Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
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Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montgomery Alpha Plus Fund

Global
Aims to generate positive returns in both rising and falling markets. Invests in 80 to 180 global businesses expected to deliver above-average returns, while selling short a similar-sized portfolio expected to deliver below-average returns. Priced daily.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.