Wednesday, June 20, 2012

Tom Russo: Investing in Global Brands

There's a good interview with Tom Russo in the most recent Barron's.

Check it out.

Russo is a partner at Gardner Russo & Gardner and oversees a $5 billion portfolio with investments in things like:

Nestlé [NSRGY]
Brown-Forman [BF-B]
Philip Morris International [PM]
Unilever [UL]
Pernod Ricard [RI.France)
Diageo [DEO]
Heineken Holding [HEIO.Netherlands]
Anheuser-Busch InBev [BUD]

He basically likes companies that own some of the great global brands and have the ability to distribute them broadly and efficiently. Russo knows quite a bit about these types of businesses and is full of insights regarding them.
(His favorites seem to be beer and spirits. I find it difficult to argue.)

The portfolio he manages tends to be very concentrated with low turnover. For example, he first bought Nestlé and Brown-Forman back in 1987.

Russo generally owns what he likes for a very long time. I wouldn't mind seeing more of it in the investing world.

So he's investing in the developing markets by way of the great global brands. What's at least somewhat notable is that he generally prefers to do this by investing in European companies over American companies.

While it's true investing in developing markets can also be accomplished (at least to an extent) with some of the U.S. multinationals, he explains in the article why he favors the European ones.

These companies have desirable brands that historically were not affordable in developing markets yet are slowly becoming affordable. So a taste or preference for a brand has been somehow established but out of reach for many. 

With the benefit of persistent long-term investments (and the passage of time so per capita incomes can grow) those brand preferences can be deepened, distribution strengthened, as the product becomes in reach for a larger percent of the population. 

This obviously all requires some patience and a long view. 

It's the redeployment of cash flows from established brand franchises in the developed markets to expand and strengthen brands in less developed markets. 

These businesses have brands the world wants and the funds (free cash flow) to develop them in emerging parts of the world. If management and shareholders are willing to endure some near term pain to accomplish it, there's an opportunity to create plenty of wealth.

So why does he favor the  European over American companies?

"Their brands have populated the world because Europeans colonized; their companies were just more global. America has had the great virtue of having a large enough market that companies could get rich without leaving our shores. Nestlé is based in a country [Switzerland] of just seven million people. It had to be global." - Tom Russo

Russo also says the stock option-based executive compensation prevalent in the U.S. has caused some American companies to under-invest. Why?  He thinks the near term pressure to produce steady earnings growth makes some of them, in the long run, less competitive.

In the interview, Russo also explains why he likes to own the better family-controlled businesses. This is a bit contrary to what some others might think of investments with substantial family control (Brown-Forman and Pernod Ricard are family-controlled). While some investors would be wary of too much family control, he clearly is not. Well, at least he is not in the case of those specific investments.

His reason? It seems to come down to: 
1) These families having lots of their own wealth at stake, and 
2) a willingness to focus on long run wealth creation instead of maximum near term profitability. 

The great franchises have a steady source of free cash flow from their established brands in developed markets. They can afford (at least the best of these can) to invest and develop in parts of the world that may be somewhat (and, if warranted, maybe more than somewhat) detrimental to near term results.

It's what Russo has called the "capacity to suffer".

A crucial factor is that they can afford to do this without neglecting (underinvesting in) their core franchise in more developed markets.

Check out the full  interview.


Long-term positions in BRKb, PM, and DEO established at lower than recent prices. No intention to add to these positions or sell.
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