A Moat in the Market

A moat in the market

A dominant market position, unique technology or geographic advantage can be the impenetrable fort that exists between you and your competitors.

Having survived the global financial crisis and seen its impact on global share markets, investors could be forgiven for wanting to avoid buying shares ever again. But we all know that shares are one of the only investments that can provide us with capital growth. History has shown that there are always good share-market investments to be found, even in a difficult economic environment. The trick is to know what to look for. Each month we will consider some of the characteristics of a successful share-market investment.

One of the first characteristics that we should insist on in a share-market investment is a competitive advantage. It makes sense to choose a company that is a market leader, or that at least has something or does something better than its competitors. A company that is in number one or number two position in its industry has obviously done something right. As the market leader, the company should be better placed to survive and thrive, even in a difficult climate. Generally speaking, market leaders achieve better profit margins than their competitors and this margin provides a buffer in tough times.

At Fisher Funds, we talk about our companies having a competitive moat, something to keep their competitors out. A moat can take various forms – it can be a dominant market position, a unique technology or product, a geographic advantage, or a pipeline of new innovations. If a company is a me-too company, it will perform along with the rest of the industry, rather than being uniquely positioned.

An example of a New Zealand company with a competitive moat is Freightways. This company began back in the 1960s, operating a courier business and has, more recently, diversified its business to include business information services (document storage and destruction). What is Freightways’ moat? The company shares the courier market with major competitor NZ Post and a number of smaller players. You will recognise some of the Freightways’ businesses: New Zealand Couriers, Post Haste Couriers, Castle Parcels and NOW Couriers. Essentially the company is a duopoly – chances are that if your business uses a courier company, it will be one of the Freightways group or it will be NZ Post. Yes, the business is competitive, but Freightways is one of two dominant players and their stable profit history over the last eight years is testimony to this.

The company has an added advantage in that it’s well positioned to reflect the performance of the New Zealand economy. Freightways delivers mail and packages from all sectors of the economy, so if there is any pick-up, Freightways should notice it immediately. This makes Freightways a cyclical company, something we will talk about in future issues.

Disclaimer: The information and any opinions herein are based upon sources believed reliable, but Fisher Funds, its officers and directors make no representations as to its accuracy or completeness. All opinions reflect our judgement on the date of this report and are subject to change without notice. The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment.

Carmel Fisher

www.fisherfunds.co.nz