Exceptional Absolute and Risk-Adjusted Returns - Why and For How Long?
Under-appreciation of strong ROIICs, reinvestment rates, balance sheets and great managers
How can it be possible for certain companies to earn exceptional absolute and risk-adjusted returns? And how long will that last? We wrote about it in last week’s digest.
As we look at our portfolio companies, most of them have been delivering risk-adjusted returns that are twice the index’ for 20+ years. Better risk-adjusted AND absolute returns; we’d naturally become skeptical about such situation: at some point, it won’t work anymore (rising competition, efficient markets will arbitrage the return vs. risk advantage away).
The outperformance of steady winners stems from the under-appreciation of maintaining strong ROIICs, reinvestment rates, balance sheets and thus the excellent stewardship of shareholder capital. Whilst these companies carry relatively low absolute risk, the relative risk (i.e. performance versus the benchmark) deters many fund managers from investing in them.
Constellation Software is one of the most exemplary quality growth companies out there. The latest annual general shareholders’ meeting was again filled with spot-on no-nonsense remarks from its CEO and President:
What I am averse to is some of the games people play with stock based compensation. And I think the manipulation of stock price that goes on with stock buybacks and the timing of stock buys and sells is bizarre. I have a hard time understanding it. - Mark Leonard - May 2024
Let’s drill into the asymmetrical risk vs. reward proposition a bit more in the below webinar (PDF material can be downloaded).