Investing in Global Brands: A Measured Approach for Long-Term Growth 🌱

Shaun Krom, our resident EasyAssetManagement Chief Investment Officer, unpacks the power of investing in Global Brands, a philosophy subscribed to by investing legends like Warren Buffett.

A strategy of Investing in global brands is akin to investing in super-stars and thus owning a piece of their success. These brands are known and loved, so they can charge more and keep sales up even when times are tough.

Think about strong brands like Nike, Apple or McDonald’s. These companies have wide moats, strong financials, are resilient over economic cycles and generally widely internationally diversified.

The power of moats

Strong global brands often possess moats, a term coined by Warren Buffett suggesting a company with a sustainable competitive advantage that protects their market share and profitability. Buffett, in particular, emphasizes intangible moats which are harder to replicate than physical assets. These moats can take various forms, including:

• Brand recognition and loyalty: Consumers readily identify and trust these brands, leading to premium pricing power and recurring revenue.
• Efficient distribution networks: Global brands have established channels to reach customers worldwide, ensuring consistent product availability.
• Switching costs: High costs associated with switching to a competitor, like loyalty programs or specialized products.
• Network effects – think Facebook and AirBnb, the value of the platform increases as more people use them.
• Innovation: The ability to consistently develop and adapt to changing consumer needs.

Physical moats could be, for example, the owning of a refinery or manufacturing system. It is costly to open a new oil refinery and it is difficult to legal the required permits. But for established global brands these physical impediments can be more easily overcome than overtaking an existing brand leader. That is not always true, for example, Buffett bought out the Burlington railway whose moat was its existing track, which is hard to compete with.

Financial performance

These factors often translate into strong financial performance, characterized by:

• High Return on Equity (ROE): They efficiently generate profits from their invested capital.
• Stable Return on Capital (ROC): They effectively utilize their assets to generate returns.
• Consistent revenue growth: Their strong brand loyalty and global reach drive sustainable sales growth.
• Management team: A competent and experienced leadership team is crucial for navigating challenges and capitalizing on opportunities.

Navigating economic cycles

Global brands can demonstrate resilience during economic downturns due to:

• Diversification: Operating across multiple countries and regions mitigates the impact of any single economic slowdown.
• Pricing power: Strong brands can often maintain prices even during recessions, as consumers prioritize essential or trusted products.
• Premium pricing: Higher profit margins lead to improved earnings and potentially higher stock valuations.
• Customer loyalty: Established brands benefit from customer loyalty, even during periods of tight spending.

Thinking like Buffett

A strong brand alone is not enough to build an investment case. An investor must take into account other considerations such as:

• Value: Global brands have a strong intrinsic value and long-term potential, but this may already be incorporated into the share price. It is not enough to find a global brand alone; an investor could look at other metrics such as its price-to-earnings (PE) ratio to determine if the share is cheap relative to its history and other shares (the PE ratio is only one such metric you could use).
• Quality focus: All brands are not created equal, an investor should do some analysis to determine how strong the brand really is and how this filters through to ROE and cyclicality.
• Patient investing: Just as building a strong global brand takes time, so does reaping the rewards of that brand, and investing using this strategy requires holding for the long term, aligning with Buffett's "buy and hold" philosophy.

Global brands across diverse subsectors

Investors think of global brands predominately in the retail sector as this is where most people come across them in their daily lives. But brands are built in a variety of sub-sectors and it’s unlikely that most people recognize that brand, but if you work in the world of chip design, you would know this brand well.

Some examples of global brands