When our investors are asked “Why Arisaig?”, a common answer would be that our strategies provide exposure to some of the megatrends that are re-shaping emerging markets, and by extension the whole world given that most people on the planet live there.
First, structurally higher GDP growth in emerging markets relative to developed markets – EM growth is expected to be roughly double the rate of developed markets over the coming decades.
Second, pent up demand from an aspirational class means that per capita consumption of basic products in emerging markets is on average about one tenth that of developed countries.
And third, and most recent is the ongoing digital revolution, which when you combine with high economic growth and pent-up demand, as well as a sheer lack of legacy offline infrastructure mean that emerging markets have the potential to ‘leapfrog’ in terms of the way that demand is satisfied.
Whilst all of this is very exciting, the main purpose of Arisaig’s research process is not understanding these megatrends but instead identifying the best businesses that will not just capture but actually amplify this growth opportunity.
The Importance of Purpose
Whilst reflecting on a challenging 2022, the long-term story continues to support that companies that sustainably create value to their customers and wider stakeholders, what we call ‘purposeful growth’ enterprises, will drive superior performance over the long term.
These are businesses which are defined by: (i) products and services that benefit customers and society; (ii) strong returns on capital; and (iii) good cashflow generation reinvested to grow the business over time – oftentimes seeding the “options” from which new business lines will grow. Their cultural attributes also tend to be hard to replicate, giving them significant and sustained competitive advantage.
Investing with purpose is not about investing in ethically perfect businesses, as we doubt such entities exist. It also does not mean pleasing everyone, or doling out equal benefits to all stakeholders. Tough decisions still must be made, and trade-offs are an inevitable aspect of any human endeavor. Yet it is a clear sense of purpose which gives the business in question a better chance of navigating these dilemmas and making better decisions where trade-offs are involved.
Purposeful businesses are also on a journey of continuous improvement, particularly in Emerging Markets. In the ever-changing world in which we live, the ability for an organisation to chart the right course in this manner supports adaptable, resilient organisations. A clear purpose should, therefore, be seen as a source of competitive advantage.
We believe that financial markets are poor at framing and evaluating the long-term growth prospects of great companies because our industry’s incentive structures are ill-suited to recognise compound growth over long periods – still less if that growth is non-linear. The upfront investment which drives long-term future value is often poorly regarded by an industry fixated on short-term measurement. Time horizons are short, as are CEO tenures.
Quite frankly it is also hard to measure Purposeful Growth. This is the main reason why we have to focus on a relatively small watchlist of stocks (around 100 all in) and why we research these in such depth, speaking to management, customers, former employees, and competitors, oftentimes out in the markets themselves. When it comes to understanding the purpose of a business and the culture that underpins this, there is no alternative to hard graft. Meanwhile, the wider industry struggles to reach a basic assessment of the related area of Environmental, Social and Governance (ESG) performance, researching from afar and relying on bulk data sets which are built to be commoditised and sold.
Hence, whilst Arisaig’s research process draws from global standards for consistency – for example, we use the Transition Pathway Initiative’s Management Quality framework as part of our climate transition risk assessments and the Impact Management Project’s Five Dimensions of Impact for our impact assessments – it is important that we complete our research on the ground. This is why I will be meeting Vatsal and other Partners in India next week to attend meetings with businesses, distributors, and consumers. To see what purposeful businesses look like in the flesh.
Arisaig is a boutique investment house, and a relative drop in the ocean in our industry. We can’t change systems single-handedly. Our mission is therefore to lead by the power of example: demonstrating that Purposeful Growth translates to superior long-term performance, and in turn giving others the confidence to shift their horizons.
