Annabelle Miller
For the past five years, global equities have been dominated by a small group of companies who have led the market rally. For many investors it has been easy to get caught up in the hype of this Magnificent 7 and miss out on the opportunities available further down the market cap spectrum. High quality, growth companies can exist anywhere. Great businesses are not defined by domicile, size or industry alone. Investors should be looking to invest in high quality growing businesses which have the ability to generate sustainable, above average economic returns that will produce superior investment performance over the long-term.
There are a number of compelling opportunities in the mid-cap space and we are increasingly seeing higher internal rates of return (IRR) in smaller, more overlooked names. The dispersion and variance in business quality increases as you move down the market cap curve, but this opens up the opportunity for alpha-generative active management. There are some very exciting high-quality, high-returning companies with sustainable competitive advantages in the mid-cap space, and our portfolio weightings are increasingly tilting in that direction.
One example is the international money transfer platform, Wise. The market for moving money across borders is slow, inefficient, and expensive. It’s still dominated by large correspondent banks who charge significant fees and spreads, and who are institutionally inhibited from changing. This is a huge market, and these banks are steadily losing share to more modern fintech competitors that have emerged to disrupt the market.
Of these fintechs, Wise has the deepest and most extensive global platform. Built over more than a decade, this platform gives Wise a structural cost advantage – it’s cheaper for them to move money from Country A to Country B than it is for anybody else. What further differentiates the company is that they take this cost leadership and share the benefits with customers, by offering the lowest prices in the market. In some ways, you can think of Wise as the ‘Costco of payments’ – it’s philosophically the same kind of business model, where scale economics are shared.
The company’s price leadership is central to our investment thesis. Payments is a volume business and offering the best price in town positions Wise well to capture a significant chunk of the volume moving away from traditional banks. Those volume gains will allow Wise to further lower prices, which will attract more volume – it’s a self-reinforcing cycle that should further strengthen the company’s competitive advantage.
Another space we find attractive is the semi-conductor equipment space. The semiconductor equipment complex experienced a sharp correction in January following the announcement by the Chinese AI company, Deepseek that it had demonstrated capabilities competitive with, or better than, frontier models from Western counterparts at lower inference costs. Investors were initially concerned this would lead to dramatically lower capital spending on the advanced semiconductor devices in servers powering AI models. However, big technology companies, such as Amazon and Microsoft, have historically seen that a decrease in the cost of technology components is positive for long term adoption across a broader number of applications. We believe this has been an overreaction by investors. We remain confident in the long-term growth opportunity for franchises innovating at the leading edge of semiconductors including TSMC, the suppliers of front-end equipment, ASM International, and back-end testing equipment, Advantest.
ASM International is a beneficiary of investment being made to develop cutting edge logic and memory semiconductors by the likes of TSMC, Intel and Samsung. It is the market leader in atomic layer deposition (ALD) machines and epitaxy tools, essential for fabricating these semiconductor devices. We view ASM’s competitive advantage as a function of its proprietary chemistry for deposition processes and customer loyalty courtesy of the high cost and time investment required to develop chemistry and layer processes. The business is well positioned to benefit from the increasing capital expenditures of foundries on the back of greater complexity in semiconductor architectures as the industry looks to ways of bending Moore’s Law.
Advantest is another great example of a ‘diamond’ in the semi-conductor space as the testing process is critical in the semiconductor manufacturing process. The testing process ensures devices operate as designed and identify defects ahead of time, particularly in end applications with zero-defect tolerance such as automotives and medical devices. The testing process also helps to improve semiconductor yields. Improving yield is the most important factor in overall wafer processing costs as incremental increases in yield significantly reduce manufacturing costs.
We take a bottom-up approach to investing, as we believe that high quality, growing companies can exist anywhere and great businesses are not defined by domicile, size or industry alone. Deep fundamental research is required to identify these truly exceptional companies. We look to own these companies long-term, paying particular attention to their valuations at any given point in time to ensure we are not overpaying.
By Annabelle Miller, principal, investments.
