How Chris Hohn's Delivered an 18% CAGR Since 2003
Key lessons to be learned from this great investor
Chris Hohn founded The Children's Investment Fund Management (TCI) in 2003, a leading value-based hedge fund. Hohn's career is built on shareholder activism and successful investments in global companies. Between 2003 and 2022, the Fund achieved an 18% annualized return. Initially, a portion of the profits generated by the fund was channeled to The Children's Investment Fund Foundation. This organization is a registered charity in England and Wales dedicated to improving the lives of children in poverty within developing countries.
Let’s elaborate on Chris Hohn’s key investing pillars and reflect on those as it relates to our own portfolio. On some areas, there’s bit of overlap with Dev Kantesaria’s strategy of owning unique companies.
We’ve already published free blogs and presentations on the topic of what makes great business over time, and Hohn’s insights are yet another layer of valuable information.
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Some of our previous free blogs include:
1️⃣ Power of Sustainable Moats and Portfolio Concentration
The prevailing narrative in investment circles often fixates on chasing exponential growth or identifying the next big thing. Hohn, however, swiftly cuts through this noise. "Neither of them", he states emphatically, referring to growth or novelty, "matter by themselves.” For TCI, the absolute paramount factor is high barriers to entry, or the 'moats' famously championed by Warren Buffett.
Hohn's rationale is brutally simple and profoundly impactful: "Competition kills profits" and "substitution eliminates your business". Therefore, a truly superior investment must possess sustainable moats, ideally fortified by multiple layers of defense, rendering it incredibly difficult for rivals to replicate or for new alternatives to erode its market position.
He elaborated on these crucial "moats" with specific, real-world examples:
Irreplaceable physical assets: diverging from many investors who fixate purely on earnings, TCI prioritizes tangible asset value. Hohn highlights infrastructure assets such as airports, toll roads, railroads, and telecom towers. These often operate as natural monopolies, where the economic or logistical hurdles of constructing a competing asset are virtually insurmountable. The Madrid airport, for instance, faces no threat of a second, rival airport being built next door. Similarly, Heathrow's prolonged struggle to gain approval for even a single additional runway underscores the immense planning and land acquisition challenges.
Highly advanced Intellectual Property (IP): Hohn champions IP that is prohibitively difficult to replicate. The aircraft engine industry serves as his prime illustration. With only two dominant players in both narrow-body and wide-body engines, and remarkably, no new entrants in over 50 years, the extreme complexity of materials, manufacturing processes, and intricate parts creates an almost impenetrable barrier to entry.
Installed base: beyond the initial sale, an installed base of products like aircraft engines generates a highly profitable, recurring revenue stream from spare parts and maintenance, locking in customers for decades.
Scale: while not a standalone guarantee, a company's sheer size and operational scale can provide a formidable competitive advantage.
Network effects: Hohn points to giants like Visa and Meta as quintessential examples. Their value spirals upwards as more users join their platforms, creating a self-reinforcing loop that's incredibly difficult for new entrants to disrupt.
Powerful brands: sustainable, impactful brands, such as McDonald's, can also serve as effective moats, though Hohn cautions that not all brands possess this enduring power.
Customer switching costs: mission-critical software epitomizes this. Once deeply embedded into an organization's operations, the complexity, data migration challenges, and operational disruption involved in switching software create exceptionally high switching costs. Hohn highlights Microsoft's strategic move with Teams, bundling it for free with its Office suite to counter Zoom. This leveraged Microsoft's immense installed base and existing customer relationships, allowing it to win the video conferencing battle even if Zoom was initially perceived as a better standalone product.
There aren’t many good businesses out there. Hohn likes to concentrate his efforts around the best ideas.
So we'll take positions of 10 to 15%, in the past even 25% of the fund. And that's a double-edged sword: if you're right, it's it's it's fantastic. If you're wrong, it's very painful. So concentration is an important facet because there aren't hundreds of great ideas and companies. And you might say that sounds risky. Then it is. And then I would look at and ask you, well, how do you define risk? And the best definition of that was for me given by Warren Buffett, who we all love, and he defined risk as not knowing what you're doing.
2️⃣ The True Drivers of Value: Essential Products and Pricing Power
While recurring revenue streams are a positive, Hohn clarifies that the predictability of their recurrence is secondary. What truly distinguishes a strong business is whether its product or service is essential rather than discretionary. Rating agencies, for example, fit this bill perfectly; while a company might defer refinancing bonds, the eventual need for a rating is unavoidable.
Hohn then issues a stark warning against profitless growth. He cites the airline industry, which, despite consistent growth in air travel for over a century, has collectively generated minimal profits due to cutthroat competition and low barriers to entry. “Growth without barriers to entry is not a combination that you want”, he firmly states.
According to Hohn, the ultimate test for a true moat, echoing Warren Buffett, is pricing power, or simply the ability to raise prices above the rate of inflation. This is where a business demonstrates its intrinsic strength.
He illustrates its power: if a company can raise prices by just 1% above inflation and maintains a 20% profit margin, its profits will grow 5% faster than revenue. This incremental pricing is incredibly potent because it translates almost directly into profit, especially for businesses operating with lower initial margins.
3️⃣ Regulatory Waters and the Art of Apparent Competition
Hohn's investment history includes numerous regulated businesses, such as airports and electricity transmission companies. He acknowledges the inherent tension: while strong moats protect against competition, they can also attract the attention of regulators. The ideal scenario, he suggests, involves weak and rational competition, what he terms apparent competition.
He points to the aircraft engine market, where competitors like Pratt & Whitney, despite facing significant technical challenges (e.g., 35% of engines grounded), remain in the market. This presence allows the industry to focus on reliability and long-term relationships rather than aggressive price competition. The intricacies of regulation are vital; Hohn highlights Spain's Aena airport group, which, despite regulated landing charges, boasts a much larger, unregulated segment (shops, advertising, parking) that accounts for 70% of its value, making it highly attractive.
His past success with stock exchanges, including Deutsche Börse and the London Stock Exchange, further exemplifies the power of natural monopolies forged through network effects and liquidity. For instance, Deutsche Börse's Eurex derivatives business achieved a "winner-takes-all" status for European bond futures. Once liquidity is established, it becomes nearly impossible for competitors to offer better prices. These businesses also benefit from "growth without capital" as capital markets expand, yielding immense value.
4️⃣ Risky and Bad Industries: A Strictly Curated Universe
Hohn maintains a stringent "long list" of industries he rigorously avoids, bluntly labeling them risky and bad based on lessons learned, sometimes painfully.
Hohn's avoided industries include:
Banks: characterized by inherently low earnings quality, extreme leverage (often 100 times equity to total assets), and dangerous opacity. He cites the risk of incompetent management leading to catastrophic shareholder destruction, recalling Anglo Irish Bank and Bear Stearns.
Auto Industry: a largely commodity business.
Retail: intensely competitive and prone to rapid shifts.
Insurance: generally a competitive industry with limited sustainable advantages.
Commodity manufacturing: lacks differentiation and pricing power.
Tobacco: while potentially profitable, it is excluded due to ethical considerations.
Most manufacturing: generally too competitive with low barriers to entry.
Traditional asset managers: highly competitive with fee compression pressures.
Fossil fuel utilities: facing existential threats from climate transition.
Wireless telecom: fiercely competitive with high capital expenditure needs.
Media and advertising agencies: subject to constant disruption from new technologies and intense competition.
Hohn's selectivity is striking: he estimates that only approximately 200 companies globally meet his stringent criteria for being high quality and investable. This disciplined focus stems from his conviction that investors consistently underestimate the relentless forces of competition and disruption.
5️⃣ Long-Termism and Conviction in Valuation
TCI's approach to valuation is unique: they don't even begin to look at it until they are absolutely convinced that a company's moats are robust enough to endure for the long haul. Their due diligence involves exhaustive reference checks, direct engagement with (and assessment of) management, conversations with competitors, and crucial internal challenges from inherently bearish team members, designed to rigorously stress-test every assumption about potential disruption.
They say there's no free lunch in finance, but actually, I do think long-termism in a great company is a free lunch because if you look at any sell-side model, they'll go out three years, if, if, or, or, or two years. And that's why, because that's the time horizon of the typical buy-side investor, one, two, or three, one or two years. But what if it can keep being good for 30 years? Then you're completely undervaluing that company.
A cornerstone of TCI's success is its long-termism. The average holding period for their current portfolio is a remarkable eight years, drastically longer than the typical US stock holding period of less than one year. Hohn views this long-term commitment as a significant competitive advantage, likening it to a private equity approach that insulates them from the pressure to sell at unfavorable market prices.
He contends that "long-termism in a great company is a free lunch" in finance, arguing that traditional sell-side models, which typically project only two to three years out, severely undervalue businesses capable of sustaining excellence for decades. He vividly illustrates this with Moody's, a rating agency that has achieved an astonishing 7% average annual revenue growth for 100 years, consistently outperforming investor expectations.
This mirrors the general view of Dev Kantesaria (Valley Forge Capital Management) who views excessive precision in valuation (e.g., getting worked up about whether a company has a PE of 24, 28, or 32) as a silly exercise because predicting the future is an inexact science. Instead, he emphasizes the importance of buying great compounding machines whose long-term intrinsic value growth will overcome a slight overpayment of 10-15%.
Hohn's preferred valuation tool is Discounted Cash Flow, emphasizing that the longer one can reliably project cash flows, the greater the intrinsic value. He reiterates Warren Buffett's profound definition of risk: not knowing what you're doing. The implication is clear: a deep, fundamental understanding of a business inherently reduces risk, regardless of position size.
The decision to sell an investment is driven by a weakening of conviction. This goes beyond mere price or perceived value; it’s about a loss of absolute confidence in the business's fundamental durability. Owning an airport or an unregulated toll road, for Hohn, carries a significantly lower risk of being "wrong" than owning a retailer, due to the tangible asset backing and reduced substitution risk. While he acknowledges the impossibility of perfect forecasting, the goal is to identify a "good or great business" within the small subset that can be reliably predicted.
6️⃣ Public vs. Private Markets
Hohn holds a strong, somewhat contrarian, belief: "The very best companies in the world are typically public companies." He argues that in many industries, scale and scope are paramount, and small is not beautiful. Large public companies possess the resources and incumbency to crush a competitor, as demonstrated by Microsoft's strategic triumph over Zoom.
While a public market investor might seem to lack control, Hohn asserts that a willing and engaged shareholder can exert significant influence. He champions acting as an owner, which is TCI's core approach. This can manifest as constructive dialogue with management or, when necessary, more aggressive activist interventions.
Hohn acknowledges that many public companies indeed suffer from poor governance due to passive shareholders. However, he firmly states that activism is pointless in a bad industry or bad company. He believes that the power of the argument can often sway other shareholders, irrespective of the activist's initial stake size.
On the perennial debate of liquidity, Hohn questions its often-overstated importance. While it provides an exit if an investment sours, he notes that in private equity, there's no easy short-term escape. However, private equity offers the profound opportunity to repair and improve a business by actively changing management, divesting underperforming operations, and fundamentally altering its course; a completely different mindset than simply selling in public markets.
TCI's decision to sell its highly successful US cable investments (Charter, Time Warner Cable) after eight years, when the industry became saturated and competitive with private equity overbuilding illustrates his pragmatism and willingness to exit when fundamental industry dynamics change.
Concentration: holding a concentrated portfolio of high-conviction positions (10-15 stocks).
Intuition: described as thinking without thinking, or knowing as a higher form of intelligence refined by experience and pattern recognition.
Focus: filtering out market noise to concentrate on the few things that truly matter.
Open-mindedness: being willing to be wrong and avoiding dogmatism.
The Tortoise Take and Two Examples
It’s clear that Hohn’s focused on durability, rolling incremental returns that keep improving because of pricing power and relatively low maintenance investments.
High returns and longevity may seem to be a bit paradoxical. High returns are like a honeypot: they attract competition. With moats come attractive returns on invested capital, and the nature of capitalism will make a high ROIC (and ROIIC) revert to the mean. That’s the generally accepted thought process. While a high ROIC is often seen as a golden ticket, we believe the real hidden value lies in identifying companies that not only boast a strong ROIC and ROIIC, but also significantly outshine their competitors in these metrics.
When a company consistently achieves an ROIC that's double or even triple that of its closest rivals, it's a strong indicator of something special. This significant gap suggests the company possesses unique advantages that allow it to accelerate shareholder value creation when reinvesting cash flows back into the business.
Two relatively boring examples from our portfolio could be Linde and Harvia.
Linde’s business model is designed to generate a meaningful economic return out of its asset base, irrespective of the macro. Its on-site customers from any end market pay it fixed facility fees that are independent of volumes. These fees are contractually required to recover out capital investment and are part of virtually every on-site agreement.
This structure allow for significant earnings stability which has been proven during the most difficult times. And the final category relates to rental payments on its owned assets such as tanks, cylinders and equipment. Although the asset network requires upfront capital outlay, the contractual rental fees help recover the initial investment regardless of gas consumption.
While pricing tracks globally weighted CPI, Linde’s productivity initiatives have created a permanent platform for better incremental profit growth during inflationary periods and/or when industrial production grows more meaningfully.
As a reminder, our Harvia deep dive can be read for free.
The leading sauna and spa company stands out in its industry, consistently achieving EBIT margins above 20% even before the pandemic. While its mostly private competitors saw an 8% EBIT margin thanks to COVID-era tailwinds, those are now normalizing. Its capital efficiency is clear, with an underlying organic ROIIC is close to 40%, and it boasts impressive returns on incremental invested capital of 25% (including M&A) since the IPO.
1H 2025 Letter to Our Partners
As the market leader, Harvia also has the best balance sheet and a clear willingness to invest for future growth, including leftover capacity from 2021. With sustained higher interest rates, Harvia's competitors, burdened by mid-single-digit EBIT margins and net debt, are barely generating free cash flow.
Their structurally low ROIIC (close to 5%, or 10% at best) and lack of scale give them little incentive to reinvest for growth. This scenario positions Harvia for accelerated shareholder value creation moving forward, even as the total addressable market seems small relative to what’s going on in AI (for example).
Harvia’s high ROIIC is driven by its gross margin and unmatched production efficiency (with continuous improvements being made every quarter). High gross margin leads to two things:
You can price your products much more competitively (thanks to efficient production) and thus provide value for your customers’ money. Harvia’s mission statement is to let everyone experience sauna.
Secondly, during inflationary periods, you won’t need to raise your prices as much as your competitors to maintain the same level of gross profit dollars.
Just like Chris Hohn, we believe there aren’t that many excellent businesses available. Our list of truly great businesses (truly great, not just marginally above-average) is likely limited to 50 names or so.
Whenever you’ve found a proven recipe for continued shareholder value creation, you need to know why it works and pay attention to one critical aspects: consistency is paramount. If you’re convinced about that consistency, then betting big and having patience should yield outsized returns.
While everyone faces setbacks, a high degree of consistency helps us focus on long-term outcomes. One or two setbacks should better not result in an opportunity cost of >5 years. Consistently high returns on incremental invested capital (ROIIC), high Internal Rates of Return (IRRs), and solid reinvestment rates create asymmetric risk/reward opportunities. When building a concentrated portfolio around a few top ideas, the aim is to hold them for as long as possible, as compounding requires time. We must strive to pick excellent, steady winners, not settle for average companies.
It's important to recognize that position sizing in equity portfolios is very similar to a company's own capital allocation. If a company pursues the wrong acquisition (betting too big on a low-ROIIC opportunity and leveraging up) or misjudges a cycle (e.g., over-investing at the peak), it will take significantly longer for these investments to yield solid returns, if any. Companies must allocate capital based on expected IRRs, dispersion, and individual project risk. It's all about target-based probabilities.
Consistency, time, and ROIIC are often underestimated and difficult to fully grasp over longer periods. Therefore, effective position sizing in a concentrated portfolio begins with a deep understanding of our companies' reinvestment and growth profiles, and most importantly, who is in charge. The better the metrics, the lower the probability of permanent loss (absolute risk) and opportunity cost (betting big on something that underperformed other alternatives).
This aligns with what we discussed in last weekend's presentation: reverse-thinking helps us understand why running a concentrated portfolio should focus on unique, multi-decade winners. Crucially, these companies should be led by very rational managers who comprehend the ROIIC and growth game. Position sizing isn't solely about financial track records; it's about trusting the right people and observing them effectively lead the company for many years, preferably over a decade.
If the metrics don't add up, the investment case becomes heavily reliant on external factors. We prefer companies that control their own destiny rather than those riding unpredictable macro tailwinds.
Finally, we focus on a crucial topic: proactive cash management. We’re on the same page with Dev Kantesaria who ideally seeks businesses with very little in the way of reinvestment, preferably zero. He views raising dividends as less efficient due to current tax rates. Also, he believes that aggressive share repurchases keep companies out of trouble, by holding virtually no cash preventing them from making mistakes.
What a great read! 🙏🏻
CT do you have a list of companies that you believe would be in the universe.