The Benefits of Growth Investing
Getting solid, above-average growth over the long term is a painstaking process, but it's well worth the effort.
There aren't a lot of companies out there that have those characteristics, but we do find them in a number of different sectors. The exception being certain sectors that are either heavily regulated, like the utilities sector, or sectors where there is no pricing power, like telecom services, where those companies unfortunately face continued decline in pricing power.
Gregg Early: I guess there's also a silent sixth criterion, which is that to make it into the fund the companies have to do at least 50% of their business outside of US shores, right?
George Fraise: Well, it is a byproduct of the process. It is not an arbitrary rule. What we find is that the portfolio today generates more than 50% of its profits from outside of the US.
What we find actually in terms of revenues, for example-which we believe is a very important way of looking at the makeup of the portfolio-37% of the revenues are generated in the US. That's a significant portion that's generated outside of the US.
Gregg Early: Do you have any specific companies that would be good examples of your process?
George Fraise: Sure. One of the companies that we've had a good longstanding investment in is Yum Brands (NYSE:YUM). This one is a US-based company, but what we like about Yum...and by the way, Yum is the company that has a number of restaurant franchises like KFC, Pizza Hut, Taco Bell...
Gregg Early: Yes, American icons.
George Fraise: It is an American icon. One of the things that is interesting is that today it's much more than just an American icon. Yum derives 50% of its profits from China and 60% of its profit from emerging markets in general. The economics are just wonderful.
In China, for example, they have 4,500 restaurants right now -- McDonald's (NYSE:MCD) only has 1,500, by the way. It costs on average about $550,000 to open a KFC in China. The first year of sales are $1.25 million and cash margins are 25%, so it's a wonderful business model and one where they have the long runway of growth because we think that they can probably get to 10,000 or 15,000 units in the future, which gives them the ability to grow for a long period of time.
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