Subscribe for updates

You can subscribe to and manage the information you receive from Stewart Investors by following the link below to our Preference Centre.

Visit our Preference Centre

Q2 2019: United States

Previous visits to the US Midwest and Seattle have left us wondering how and why clusters of quality companies develop. On this trip, an “unexpected” snowstorm in New York and the Midwest gave us cause and some time to contemplate a possible connection between extreme weather and risk aware cultures.

Perhaps one has to plan better, withstand difficult working conditions, and be better prepared for externalities that can harm a business directly or indirectly? And is the opposite true in Silicon Valley, where the weather is seldom a distraction or a disruptor?

The San Francisco Bay Area in northern California is home to some of the world’s most inventive and largest companies. The bay area has historically served us a weird cocktail of a massive investment universe but few investment opportunities. We must surely have been wrong? There must surely be conservative company cultures bubbling beneath the slick surfaces? Not for the first time, we head to The Valley seeking answers to these questions.

And not for this first time, we are struck by the energetic pace of innovation, a fail fast mentality, and a desire for control. Some aspects of this prevalent corporate culture sit uncomfortably with our investment philosophy, which places more emphasis on what could go wrong than what might go right. In this context, it was encouraging to come across some companies that appear to have chosen a more conservative path.

KLA Tencor is a leading provider of equipment to semiconductor chip manufacturers. The company had an options1 accounting scandal more than a decade ago. This, among other things, led them to simplify their approach to compensation. They have turned their back on the issuance of options and the use of complex performance metrics in their remuneration policies. This has helped the company focus on the long-term, attract and retain the right people, and foster a culture which is slowly but steadily heading in a different – and we think more positive – direction. Their compensation practices are far from perfect, but they stand in quite stark contrast to most in the valley.

Fortinet, a founder-controlled and managed security software company, has had to fight recent battles on two fronts. First, an activist investor showed up on the share register for less than a year and demanded bigger profits, a ‘return’ of cash to investors (which these days almost invariably means share buybacks rather than dividends), and a riskier balance sheet. Meanwhile the company was dealing with ever-greater competitive pressure, including from the well-funded Palo Alto Networks, where management are on option steroids. Fortinet has seen off the first battle: the activist investor sold its stake for a quick buck. The experience has helped Fortinet to better balance profitability and long-term aspirations without losing the sanctity of their balance sheet.

None of this is new to the founder, whose previous company’s fortunes were dictated by venture capitalists. That experience led him to be wary of short-term influences determining the future direction of Fortinet. However, Fortinet continues to fight the battle of retaining high quality people; their fiercest competitor down the road just offered USD130 million to their new CEO.

Intuitive Surgical is a pioneer in the world of robotic surgery and now almost ubiquitous in the American surgical ecosystem. But the journey to get to this position involved some interesting twists and turns. Intuitive had to part ways with founder Fred Moll in 2002 because of differences over the company’s future direction of travel. It was a bold decision for professionals and the Board directors to disagree with their iconic founder and inventor. But their decision to focus on the company’s core strengths has proven to be the right one for a wide range of stakeholders. Over the last two decades, Intuitive has been competing mostly with its founder, who recently sold his latest venture to Johnson and Johnson. History might suggest neither were wrong but only if financial returns to shareholders are the sole criterion used to gauge success.

What companies like KLA Tencor, Fortinet and Intuitive share is a desire to remain independent, to be second to none in their respective fields, and to safeguard a conservative balance sheet. Their size and profitability enable them to keep spending more than their peers on developing technologies of the future. Huge research budgets are no guarantee of future success, but they are a necessary condition to survive and succeed in the technology arena. Even more importantly perhaps, they are evidence of a long-term mindset and culture.

Circumstances and events have played a decisive role in shaping the histories of these companies. And the responses and choices of those who have stewarded them have instilled some attractive traits in their cultures. Understanding company histories is an important part of the quality puzzle for us.

A trip that got off to a difficult start due to poor weather ended with a pleasant surprise in the sunny valley. We have enough reasons to believe there is quality lurking beneath that bubbly surface.

  1. Options are financial instruments that are derivatives or based on underlying securities such as stocks, bonds, commodities

Source for company information: Stewart Investors investment team and company data. For illustrative purposes only. Reference to the names of each company in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.

Important information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).


In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto.

In the Middle East, this material is communicated by First Sentier Investors (Singapore).


If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.


By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.

Copyright © (2021) Stewart Investors

All rights reserved.