BCSMX – Investment Strategy
The Manager of the Fund believes that, over time, changes in a company’s per-share “intrinsic value” will drive its stock price. Absent dividends and distributions, and multiple expansions and contractions, growth in underlying business value should – in the Manager’s opinion – be reflected in a rising stock price. As such, the sourcing and vetting of investment ideas by the Manager is focused on factors that may allow for compounding per-share value creation beyond what an average company might exhibit. These factors include (1) the competitive aspects of a business, which can allow a company to earn returns on its capital in excess of what might be possible in an environment of pure competition; (2) the management team running a business, who allocates shareholder capital and executes on strategic plans; and (3) the growth prospects of a business, which may include a significant runway for internal redeployment of capital in high-return projects or external deployment of capital into mergers and acquisitions.
The Manager engages in field research, which can include visiting company facilities, attending industry trade shows and user conferences, speaking with customers, and other activities that crystalize its understanding of a company’s competitive position. Distilling the thousands of companies in the Fund’s investment universe down to a small group that has been prequalified as exhibiting the most exceptional qualitative characteristics has been the result of over 20 years of cumulative research by the Manager. The result of this distillation is a portfolio assembled and weighted according to the conviction of the Manager and is intended to be optimized for return potential.
Qualitative Research Focus
Sustainable Competitive Advantages
Competitive forces dictate that most businesses fail to earn in excess of their cost of capital over extended periods. However, companies with durable and sustainable competitive advantages – which the Manager refers to collectively as a “moat” that protects a business from competition – can avoid this fate through structural characteristics that preserve profitability. The Manager assesses the sources of a company’s “moat” – including cost advantages, intangible assets, network effects, switching costs, and other factors – and the likelihood that they will persist over the long term.
Talented and Trustworthy Management Teams
Exceptional people can create and maintain exceptional companies. The Manager’s assessment of company management extends beyond the obvious protections and alignment of interests that the Fund seeks as a passive, minority shareholder. The Manager also looks for integrity, operational excellence, capital allocation acumen, competitive drive, and an ability to win in a dynamic marketplace. In the Fund, this often manifests in the form of founder/owner/operator-led companies.
Substantial and Underappreciated Growth Potential
The Manager attempts to invest in businesses that have the potential to earn high incremental rates on their invested capital for extended periods. The ability to compound earnings over the long term can be a primary driver of increasing business value and may be overlooked by market participants with shorter time horizons. The Fund’s long-term orientation allows it to benefit from underappreciated sources of growth within a business, including market share gains in large, core markets; expansion into adjacent or newly formed markets; commercialization of intellectual property; and execution of value-enhancing acquisitions. Traditional business valuation methodologies often fail to capture the full benefit of persistent competitive advantages coupled with reinvestment opportunities, thereby dramatically underestimating the future earnings power of the most exceptional companies. Therefore, the Manager believes that it is possible, via a well-funded research effort, to gain a variant perception on the intrinsic value growth potential of a business based on a thorough assessment of pertinent qualitative attributes.