“Our attitude is that of a museum director: we only want to own masterpieces.” (François Rochon)
Chances are that, just like us until a couple of weeks ago, you have never heard of Giverny Capital, even though the name might sound familiar. It was inspired by one of the most breathtaking gardens in the world, created and cared for over many decades by Claude Monet, the pioneer of the Impressionist movement. François Rochon is a Canadian investor and the founder, long-term president, and portfolio manager of the Montreal-based firm. We are bringing him up because we recently came across his annual letter celebrating the 30th anniversary of his flagship fund, the Rochon Global Portfolio. Such longevity is rare among asset managers, making him one of the most seasoned investors with a quality-growth focus.
Rochon’s investment philosophy revolves around owning a small number of great companies for the long term. Emulating the dedication required to preserve Monet’s garden, his mission is to create wealth through thoroughly selected, high-quality securities. As he once noted, “Our attitude is that of a museum director: we only want to own masterpieces.” Rochon aims to hold around twenty companies in his portfolio, with an average holding period exceeding seven years. He strives to remain unfazed by the vicissitudes of the economy, geopolitics, and financial markets, remaining fully invested at all times and accepting that trying to time the market is a fool’s errand. The Rochon Global Portfolio has returned a whopping 14.8% annually over a period of 30 years, compared to 10.2% for the S&P 500. Even if we consider that these are pre-fee results (which would deduct about 1 percentage point), the outperformance gap speaks for itself.
You might start to wonder whether, with such long average holding periods, this investment performance should exhibit some correlation to the underlying fundamental results of the companies in Rochon’s portfolio. We believe the single most valuable takeaway from his annual letters is an incredibly long track record of the fundamental performance of his portfolio constituents going back almost to the fund’s inception. Since 1996, he has included a summary table in each year’s report containing the growth in the intrinsic value of his companies, using Warren Buffett’s “owner’s earnings” approach. He estimates the increase in the intrinsic value of his holdings each year by adding the growth in EPS and the average dividend yield of the portfolio. This analysis is not exactly bulletproof (we would prefer EVA-based metrics); still, it is approximately correct over multiple decades. In fact, between 1996 and 2023, Rochon’s portfolio constituents have grown their intrinsic value by 12.9% annually, matching the 12.9% annualized return their stocks have produced over this timeframe. Of course, the figures could deviate significantly in a single year due to fluctuations in valuation, but the long-term trajectory is self-evident.
We have long known that investment returns are determined by the fundamental performance of the underlying companies in a buy-and-hold portfolio. Seeing such quantitative evidence in a real-world setting was nevertheless reassuring. The longer the holding period, the closer your returns will match the underlying companies’ fundamental return, but this is by no means a green light to be valuation-agnostic, as you can be right about the success of a business without necessarily achieving a good return on your investment when you lack caution regarding the price paid.
No wonder Rochon’s analysis made us curious about how the EVA Monsters within our investable universe fare in a similar backtest. We chose a timeframe of ten years, as it seemed like a fair compromise between a long enough period and sufficient company data, given that a substantial number of names have barely longer track records as public entities. We compiled a hypothetical equal-weighted portfolio in 2014 (investing $1,000 in each company) and computed the look-through EVA for the group. We repeated this exercise for today as well, keeping the same number of shares from each company and letting them “run freely” over the period. Note that the look-through EVA contains the impact of share repurchases as well, as it is computed using the aggregate EVA per share figures of the portfolio constituents at both points in time. We also added our estimate of the average dividend yield of the companies as the best proxy to model the contribution of dividend payments. The results were staggering: our EVA Monster universe delivered an annualized total return of ~23%, of which ~21% can be attributed to the fundamental return component. For reference, the S&P 500 has delivered a ~12% annualized total return over this timeframe, out of which the fundamental return explains ~9%.
Two major takeaways to note from this comparison: (1) the fundamental return of the EVA Monster universe has been head and shoulders above the market’s average. One could argue that there is survivorship bias (since we composed our universe based on exceptional backward-looking fundamental performance), but we contend that these companies also have excellent prospects going forward, even though the gap will likely narrow to the S&P 500. (2) The impact of valuation is quite similar in both groups (2 percentage points tailwind for the EVA Monster universe and 3 for the S&P 500). Its contribution is rather modest in both cases, and it would likely diminish over multiple decades, as shown by Rochon’s analysis.
It’s crucial to understand that two equal total return potentials could vastly differ in composition. We are talking about two completely different investment scenarios depending on whether the fundamental return or the change in the valuation multiples is the key contributor. On the one hand, we deem our EVA Monsters capable of delivering double-digit fundamental returns for years to come. These firms are best suited for true buy-and-hold investing, which requires judging the sustainability of above-average fundamental performance and trying to avoid overpaying. On the other hand, the typical Fallen Angel investment thesis is about an expected recovery in valuation multiples, leading to an attractive total return potential despite the (more often than not) subpar fundamental performance outlook. Remember, though, that a valuation rebound is a one-trick pony. In either case, the longer you hold onto these names, the higher the chance that your performance will converge to the underlying fundamental performance of your holdings.
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