Reshared via Investor Strategy News:
Soul Patts CEO Todd Barlow explains why patience means nothing without structural freedom, why diversification is about uncorrelated returns, and how Soul Patts has delivered 123 years of disciplined capital allocation.
Washington H. Soul Pattinson & Company, better known as Soul Patts, is one of Australia’s largest diversified investment houses with a history spanning more than 120 years.
The firm invests across listed equities, private companies, credit and real assets with an unconstrained mandate, permanent capital and a long-term philosophy built around enduring value.
Since listing on the ASX in 1903, Soul Patts has never missed a dividend payment to shareholders and has increased the dividend every year since 1998.
Soul Patts CEO Todd Barlow sat down with Investor Strategy News to share how the firm thinks about patience, risk and permanent capital across more than 120 years of compounding.
The word that comes to mind to describe the market right now is persistent. Despite inflation, rising interest rates, a slowing housing market, higher oil prices, wars, and de-globalisation, markets appear to be persistently strong.
Flexibility is the word we focus on to capitalise on the current market. We believe you need flexibility to be able to move in and out of different asset classes as opportunities arise and construct bespoke solutions for people. The market is changing and creating distortions that create opportunities.
That diversification means a widely held equity portfolio. We believe in diversification, but in diverse uncorrelated returns. We look to invest in different asset classes that behave differently to each other at different times in the cycle. We are happy to be concentrated in some assets or segments we really like, so long as they are uncorrelated to other things in the portfolio, and this reduces overall risk and volatility.
Another belief worth challenging is that investing is all about stock selection. The evidence is compelling: asset allocation decisions drive performance far more than individual stock selection but people spend most of their time talking about which stocks to buy.
“How do you reconcile patient, long-term investing with a high level of transaction activity?”
We don’t equate patience with being passive. We are constantly moving assets around the portfolio to make way for new ideas.
What we are looking for in our new ideas is investments that will do well over the long-term and can compound and grow into more significant businesses. We are willing to stick with businesses exhibiting those qualities for really long periods.
Perhaps more relevantly, patient and long-term means we are not focused on short term fluctuations. We are not worried about the daily stock prices of our portfolio; we are more concerned about the quality of the assets we own and the direction they are moving in.
And lastly, being patient means we don’t feel compelled to act. We are happy to wait for the right opportunities to present themselves. Patience is only genuinely valuable if you are structurally free to exercise it.
Many investors who believe in long-term value are nonetheless subject to redemption cycles, quarterly reporting, and benchmark pressure that makes patience a philosophy rather than a practice.
Only invest in what you understand.
It’s not direct advice per se, but I think a lot about the Mark Twain quote: “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” I think with investing you need to constantly second guess yourself.
We are always asking ourselves: Why is this investment for us? Why wouldn’t other people do it? What are we missing? Where do we differ from consensus?
We seek to be high conviction about our ideas without being blind to the possibility of getting it wrong. We therefore aim to mitigate risk by building in structural protections, diversifying the portfolio, and by sizing our investments appropriately.
Investing is a competitive market, and assets are priced based on what people believe will happen in the future. Unless you are prepared to take a different view, it is hard to perform better than the market. And even when things are going well, you need to monitor what risks are emerging, what is changing and what else you could be doing with that capital.
Our focus on risk. Everyone loves to talk about the returns, the success stories and the increasing dividends, but few people appreciate that we seek to deliver superior financial returns to our shareholders while employing lower risk. Our aim is to exceed market returns with a portfolio that is lower risk than the market. We focus on consistency of returns, protecting capital, and building a resilient and diversified portfolio.
We manage risk by investing in high-quality businesses that perform well through market cycles, by having a diversified portfolio of uncorrelated returns, by employing low levels of leverage in our investments (and at the holding company level), by maintaining cash available for opportunities, and by not chasing the latest fads and unproven business models.
Following on from the previous question, the investment industry (especially funds management) is generally preoccupied with returns and pays too little attention to the risk taken to generate them.
We look at generating outsized returns for the risk employed. How that risk is measured varies by asset class. At the whole-of-portfolio level, we want a portfolio that consistently performs better when the market loses money, is less volatile than the market, and still beats the market over time.
It’s always difficult to predict when a crisis will hit or what causes it. Some factors that might be a trigger: higher interest rates, falling house prices, or if the market believes that there is an AI overbuild. The wealth effect from housing (and equity markets in the US) and global AI capex are significant drivers of economic growth right now.
The market structure might exacerbate any fall given so much trading is conducted by algorithms that could all sell in the same direction following an event.
Complacency, or hubris about our own structural advantages and track record. Permanent capital and a flexible mandate let us be opportunistic and take long-term views. However, those structural advantages can only be realised through disciplined capital allocation, decision by decision.
If we can keep instilling a culture of sensible, disciplined decision-making, we give ourselves the best chance of continuing to deliver for shareholders over the long term.
We are using AI as a productivity tool to help our team research and create documents more efficiently. It is increasingly being used to challenge our ideas and capture more information and data that can be shared across the firm.
The deeper question AI raises for us is an investment one. We are watching carefully which businesses have durable competitive advantages in an AI-affected landscape and which are vulnerable to displacement.
I am not sure anything replicates the particular privilege of stewarding a 123-year-old institution alongside Chairman Rob Millner. If you like investing, there is no place better.
I do think we are over-regulated. The volume of disclosure in annual reports, prospectuses and product disclosure statements now runs into hundreds of pages and I don’t think that necessarily serves investors, while it imposes a real cost for a company like ours.
My concern is that we keep adding disclosure requirements because it’s the easier thing to add, not because it’s what changes behaviour.
If I was to design an investment firm from scratch, it wouldn’t look any different to what Soul Patts is today.
I believe the perfect firm would have the same investment strategy with the competitive advantages of permanent capital and flexible mandate.
However, the reality is I wouldn’t be able to replicate the history, reputation or track record.
Source: https://ioandc.com/todd-barlow-patience-is-only-valuable-if-youre-free-to-exercise-it/