The latter is a small shop used to punching above its weight. With about 130 employees and $60bn (£47bn) under management, Walter Scott runs the BNY Mellon Long Term Global Equity Fund in addition to its own-name products.
Dr. Walter Scott founded the firm in 1983 together with Ian Clark and Marilyn Harrison. Since then, the fabled buy-and-hold asset manager has grown its reputation entirely by word of mouth, since it deliberately maintains no sales or marketing function. Walter Scott is owned by BNY Mellon, but it operates as a fully autonomous unit with its own Board of Directors and investment philosophy.
The managers’ overarching objective is to harness the power of compounding. Einstein called compound interest the "eighth wonder of the world", and many an investor will sing its praises. Walter Scott is amongst those who decidedly practice what they preach. While some firms might set a target price for the stocks they recommend, Walter Scott buys a company with no expectation of ever selling it.
Such conviction stems from an unusually rigorous investment process involving a diverse range of sources. The starting point is always a company’s accounts, but the managers will also consider academic research and industry experts’ commentaries. They will host forums with policy experts at Walter Scott’s offices, and embark on extensive fact-finding missions abroad.
These research trips inform a simultaneously wide-ranging and detailed view of each company under consideration. The managers leave no stone unturned, interviewing government officials and journalists, and travelling to companies’ smaller regional offices to talk to local management teams and suppliers.
Each name in the portfolio has a "stock champion" who pushed for its inclusion. The process is not easy – recommendations face extensive questioning from the broader team about the company’s growth prospects, financial health, sustainability, and valuation. It often takes multiple interrogations over a period of several months before a stock champion is able to prove that his company meets all of the firm’s stringent investment criteria. The research team must unanimously approve any investment idea, and the decision must be further ratified by the firm’s managing director, executive chairman, and two investment directors.
Keyence, a leading supplier of sensors and measuring instruments for manufacturing, exemplifies the team’s ultra-long term approach – Keyence has been a staple in Walter Scott’s portfolios since 1993. The firm has a "rock solid" balance sheet, and through continuous reinvestment its net profit has grown 15% each year.
Walter Scott has also owned shares in American oil and gas producer EOG Resources since 1993, though it was involved even earlier as an investor in EOG’s predecessor companies. Over the past three decades, EOG has repeatedly seized the "first-mover" advantage. It was one of the first companies to access unconventional gas reserves through horizontal and directional drilling, and is now applying those same techniques to its billion-barrel oil reserves. While many oil companies sink with the price of oil, EOG generates after-tax returns of at least 30% even when black gold is trading at a mere $40 per barrel. These margins are robust; EOG’s existing reserves contain over 12 years of drilling potential.
The fund will, of course, sell a holding if the investment rationale changes or the company’s performance deteriorates beyond repair. But it is not a frequent occurrence, which keeps the fund’s turnover and trading costs low.
Low cost active management? Not an oxymoron.
Cameron Ho graduated from Exeter University with a degree in Middle East studies in 2015. He joined Fidelity in September 2016, and currently writes about funds.
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