- Mike Tian comanages the Focused Emerging Markets Investor Fund for WCM Investment Management, which has outperformed 99% of global stock funds of the past five years.
- Tian says there are two characteristics a company must have before he’ll consider investing in it: a growing “competitive moat” that sets it apart from competitors, and a strong corporate culture.
- He also named three international companies that he expects to thrive over the next five years.
- Visit Business Insider’s homepage for more stories.
When it comes to the companies he wants to invest in, Mike Tian says Warren Buffett has it about half right.
Tian is one of the managers for WCM Investment Management’s Focused Emerging Markets Investor fund, one of the most successful global stock funds of recent years. Over the 12 months, that fund beat 98% of its peers with a 20.9% return.
The last few years are just as dramatic: Over the past three and the past five years, it’s surpassed 99% of its rivals with returns of 17.7% and 9.6% per year, respectively. That’s helped it earn a five-star rating from Morningstar, and Kiplinger calls the emerging markets fund one of the best global stock funds of the past five years.
In an exclusive interview with Business Insider about his approach, Tian mentions legendary investor Buffett twice, agreeing with him once and disagreeing once. Where the two agree is the idea of “moats” that will protect companies from their competition for years.
Tian takes that idea a bit further, seeing he wants to find companies whose competitive edge is getting bigger.
“For us, the most important thing is not just thinking about these competitive advantages in a static sense, but rather, aligning yourselves with the companies whose competitive advantages are actually getting better over time,” he said. “You want to avoid companies whose competitive advantages are being eroded away.”
But he splits from Buffett in another respect: While the Oracle of Omaha has advocated investing in businesses that are such a strong position they could be run by an “idiot,” Tian wants businesses where the details matter. He says that if employees at all levels are engaged and making the company better, its moat will expand.
“We believe that corporate cultures are actually very, very important to the longer-term success of a company,” he said. “It’s almost invisible on a day to day level. But we’re talking about these slow changes over time.”
He continued: “And the corporate culture is what really allows a company to kind of accumulate these small changes … this is very intangible, but it’s very powerful.”
To learn as much as possible about a company’s culture, Tian says he and his co-managers give executives a questionnaire developed by Harvard Business Professor James L. Heskett. They also speak to lower-level workers, former employees, customers, distributors, and others to talk about the company and its approach.
Tian adds that the culture they’re looking to measure might be more important than strategy or the plans of a CEO who will probably only run the company for a few years.
That approach has helped Tian find the companies that have taken the fund to the top. Listed below are the three companies he thinks will help it stay there. They’re his top picks for the next five years, the typical holding period for his fund.
(1) Taiwan Semiconductor
Taiwan Semiconductor is the largest position in the fund at 7.2% of the portfolio, and Tian says its culture has helped the company open up a big lead on its competitors.
“The amount of capital and expertise that’s takes to construct a new foundry has increased massively, massively,” he said. “So as a result, many of the competitors that were in existence back in the day have dropped out of the business.”
A second culture advantage? Satisfied employees, which makes the company more efficient.
“It’s well known in the industry that their senior engineers are almost impossible to hire away,” he said. “That team has been stable for two decades at this point.”
(2) WuXi AppTec
WuXi AppTec is an example of the widening moat concept, as Tian says it once competed with other drug development, manufacturing, and research companies rivals on price, but is doing more and more sophisticated work.
“They are kind of moving up the value spectrum, becoming more differentiated, becoming more indispensable to their clients,” he said. “There’s obviously a very significant runway to growth because the amount of kind of, especially discovery and early stage work that’s been outsourced is still discovery work especially is really quite small at this point.”
(3) HDFC Bank
HDFC, the fund’s third-largest investment, is stands above its competition and is benefiting from some trends Tian wants to take advantage of: India’s growing financial system and a shift away from state-run banks to private sector institutions.
“It’s the largest and probably the best run bank in India,” Tian said of the company. “We certainly think there is a very much, a long, long, long runway to growth there.”
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