Bridgehouse Asset Managers’ Post

Transcript

Hi. I'm Matt Brundage here at Bridgehouse, and I recently had a chance to speak with Louis Florentin-Lee, managing director and portfolio manager at Lazard Asset Management. I asked Louis for his views on the current environment, and what happens if the current conditions of sticky inflation and higher rates remain going forward. Here's what Louis had to say. So if we are in that environment where inflation remains elevated, then what's gonna then all then the inference from that is that all companies are going to be seeing persistent cost pressure into their businesses. And therefore, in our view, a key determinant for the success of businesses and their ability to maintain, let, you know, forget about the increase, but just maintain their profitability and their margins will be the ability of companies to pass on those that cost that inflation. I.e. "Do your companies have pricing power?" And I think that's where this portfolio will be well- placed because in our view, high-quality businesses, one of the defining features of high-quality businesses is high-quality their is their pricing power. Their competitive advantages, whether it be in technology or in brand or the fact that they make a critical product or service for their customers where it represents a very small part of the customer's cost base or regulation, but something about something within those competitive advantages enables these businesses to have pricing power and therefore be able to offset those cost pressures. So in an environment where inflation is high, I think compounding stocks, these types of businesses will perform very nicely relative to the average company or the more structurally challenged businesses. Plus, if because of that high inflation environment, interest rates need to stay elevated, then I believe that, again, it will be beneficial to our businesses because these high-quality companies generating high returns on capital can essentially fund their own growth out of their own cash flow internally generated cash flows and earnings. And that's what enables them to reinvest back into their business and grow. Obviously, if you have a much higher interest rate environment, that is going to make borrowing from companies that don't generate high returns on capital much more difficult. And therefore, I think, again, that plays to the advantage of these high-quality businesses. So in that environment, I would expect a portfolio of compounders to do very well.