On the Road: An International Manager's Search for Opportunity

Travel is an integral part of our investment process — but several years of pandemic inhibited our ability to travel internationally. As the world has reopened, we have resumed traveling and are finding interesting opportunities on the road, which has added nicely to our investing pipeline.

Before exploring some of our findings, it’s worth first revisiting why we find travel valuable. Our travel objectives are clear: First, we want to eliminate businesses and management teams in which we don't want to invest; we also want to be highly selective and curate our portfolio as you would any exclusive collection. To do that, we look far and wide but are highly selective about what we own. Second, we want to find new ideas — interesting businesses that could have a place in our portfolio one day, if not necessarily today. Third — and most importantly — we want to understand and refine our estimates of intrinsic value, which is our true north. Our analysts spend most of their time following their curiosity and intuition, trying to understand intrinsic value, and travel is an important part of that process.

In 2023, our team has traveled to Japan, India, Mexico, France, the UK and the Nordics — meeting with management teams and visiting factories, stores and depots. I spent a week in Mexico City, where our portfolio holding FEMSA is domiciled and offers an interesting peek into our travel-related practices. FEMSA owns the convenience store chain OXXO, the largest small-box retailer in the Americas. We've been long-term shareholders and know the company quite well. Consequently, I spent most of the time during my trip trying to understand the rest of the retail ecosystem in Mexico, visiting stores across all formats — mostly retail grocery stores. I started with the high-end city market stores in Polanco, an ultra-wealthy neighborhood in Mexico City, and worked my way down to the bodega store format Walmart has in a more modest neighborhood.

The stores I visited all belong to one of roughly five listed retail companies in Mexico that are interesting from an investing perspective. I also met with their management teams to understand how they think about capital allocation. During the store visits, I got to walk the aisles to see what's on the shelves and which consumer goods dominate. The output of this exercise was a select list of consumer goods companies in Mexico that dominate the aisles.

Consequently, at the end of the trip, I had a better, deeper understanding of one company we already own and another five or six consumer goods companies we don’t. These companies may not turn into investment ideas right away, but as Mexico’s election season heats up, headlines could shift in the latter part of the year, giving us an opportunity to possibly introduce one of these names — and if so, we’ll be ready to capitalize on what I would call an attractive consumer sector in Mexico.

As analysts, we are always trying to connect the dots and looking for a chance to answer any open questions. For example, one of our analysts recently held a series of management meetings in France. We own a great business in the UK called Howden Joinery that sells kitchen remodels. Its format has been tremendously successful domestically, and over the last few years, it has invested to export its format to France without much success.

When our analyst was in France, he visited the Howden Joinery storefront, met with the depot managers, understood morale and compared it to what we've seen in the UK. Henceforth, Howden Joinery’s endeavors and investments are no longer just numbers on the pages of an annual report or a discussion with management — they’re more tangible to us, having seen them in action. When we can connect the dots, we position ourselves to better judge whether this capital allocation is likely to work out or not, and we get to judge whether we think Howden Joinery’s UK model can translate to France’s market — an assessment that is difficult to make without some on-the-ground experience.

We’ve also been on the road in Japan recently. Japan has a lot of great companies, but the big question has always been management teams’ attitudes toward shareholders. Over the last few years, companies have made sluggish, hesitant attempts to align with shareholders. But recently, we have seen some signs this is changing — whether via capital allocation practices, simpler corporate structures, returning some excess capital to shareholders, or even accepting activist investors more willingly. Another exciting development in Japan occurred earlier in 2023 when the head of the Tokyo Stock Exchange made bold statements about creating some peer pressure for Japanese companies to increase shareholder activism and simplify structures.

That said, we are looking for exceptional companies we think we can invest in. In Japan, the concept of monozukuri means the art of making things — an ethic of craftsmanship unique to Japan and hard to replicate. One example I can think of is Nintendo — its memorable characters, from Super Mario to Legend of Zelda; its top-notch hardware, from the Wii to the Switch. Those attributes are hard to replicate, and we think that's what makes certain Japanese companies sustainable, long-term investment candidates that are relatively independent of economic, yen or demographic developments.

These are just a few examples of the findings we believe are invaluable to our investment process. Reintroducing travel as a significant source of research and data has been highly productive for us over the last year or so, allowing us to broaden and deepen our knowledge of our own portfolio holdings and pipeline candidates. This will allow us to introduce high-quality names at opportune moments (when businesses are trading at an attractive discount to our estimates of intrinsic value) and to manage the portfolio with a long-term view.