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

Q4 2019: Europe

In comparison to over 30 years of history exploring and understanding our investible universe across the Asia Pacific and other Emerging Markets, we are still in the early years of this experience with our Worldwide strategies.

We began this journey with the belief that our focus on finding competent and ethical stewards of high quality franchises would deliver outperformance not only in our Asian and Emerging Markets strategies, but also in a Worldwide universe. While this fundamental philosophy of finding cash-generative franchises with excellent stewards has remained firm through this process, our Worldwide explorations have provided us with a few different lenses through which to interpret what stewardship means to us.

As we read more about the histories of a number of companies in this broader universe and meet with the management teams of these businesses, we have found a select number of companies that demonstrate strong embedded cultures, despite the lack of a large economic owner in the form of a founder, family or foundation. Our recent trip to Holland, Denmark and Switzerland provided us with great examples of this embedded cultural stewardship. Here, we found evidence of competent managers who form the bedrock of the cultures of these companies, never compromising on long-term growth for a shorter-term boost in profits, and acting in the benefit of all stakeholders.

ASML, the world leader in lithography systems for semiconductors and the backbone of the industry, has consistently demonstrated this cultural stewardship enabling the business to cement their position as market leader over the past two decades, on the back of technological superiority. They have not always been the market leader though – starting out behind Nikon in 2001, they have been able to establish this formidable franchise with close to 90% market share through consistent reinvestment sustained by a culture of never resting on their laurels.

Given how critical research and development (R&D) investments are to this business, competent managers must fundamentally think about the long-term. In this context, the Chief Technology Officer of the company (who also happens to be the very first employee) talks at length about partnering only with other businesses who can envision what they will be doing in ten years’ time. This is essential for all parties involved to make both the sizeable financial and time-related commitments required for new initiatives.

Interestingly, this results in 80% of ASML’s supply chain being private, either owned by a family or a foundation, capable of taking those long-term decisions.

These myriad measures ensure that in the instance of an unavoidable downturn, ASML will not be compelled to reduce any of their strategic expenses but, rather, will be able to increase their R&D spends to further their technological dominance.

Another anecdote that speaks to the stewardship at ASML is the management team’s attitude towards remuneration and what they take out of the company. The CEO has explicitly chosen to remain true to a remuneration philosophy where ‘enough is enough’. He has also realised that the buck stops with him, and sets the tone himself: ‘I say, that’s OK. I don’t need more.’1

Earning multiples less than his peers elsewhere, when particular colleagues ask for changes to their remuneration structure, he is willing to lose some people rather than to change this belief. It is a further testament to the technological excellence that the company has developed that there is never a dearth of high quality, focused R&D professionals keen to join them. In a world where remuneration often plays out like a rigged game, to see a CEO choosing to draw a line unequivocally, focus on business interests rather than tweaking short-term metrics, is to us a sign of long-term stewardship.

We saw similar signs of this cultural stewardship at SimCorp, a software company in Denmark that builds products for asset managers aimed at reducing costs and mitigating risks. Since the founder retired from the business many years ago, the company has steadily built a culture of paranoia, constantly focusing on what could go wrong. One of the things they realised early on was that in a small industry, building trust and a strong reputation was the only way to get their foot in the door with larger asset managers. This is an industry where they had to rely on their clients to act as references and sources of new introductions as well, and as such, remain consistently paranoid about reputational risk. They realise that even a single error or glitch in one of their products could result in an impact several times that magnitude for their clients, eroding the trust that they have worked to build over decades.

This attitude also seeps over into how they treat their own financials, having maintained a net cash balance sheet with close to zero total debt since they were founded. A sound and steady balance sheet on their part is essential to convince their clients that their products are not here for the next year or two, but for the next 20.

With these close to fully free float companies, despite the cultural stewardship, there is always the outside risk of a hostile takeover approach. Both ASML and SimCorp face the possibility of this challenge, and have taken some precautions to guard against this.

ASML realised the value of independence early on in their journey, with the separation from Philips in 1995 allowing them to start focusing on their own endeavours. In 1998, shortly after a public listing, they took measures to preserve this independence. A foundation was created with the option to purchase preference shares of the company to safeguard the “independence or the identity of ASML.”2

While SimCorp does not have a formalised structure as ASML does to prevent takeovers, they have the same paranoia as they do with their other business interests. In the event of a takeover bid, the acquiring company would require at least 90% of the votes to close the deal. SimCorp has researched their shareholder base to tabulate that a little over 10% of their shares at the moment are held by employees and former employees, one measure that the company may be able to use to prevent a takeover. This is not an infallible defence by any means, but a positive sign that the management team is awake to the risk and thinking of means to protect the business.

To us, meetings with companies such as these reiterate the importance of stewardship as an essential ingredient in the long-term success of a company. There are a tremendous number of free float companies in this Worldwide universe, but we are lucky enough to be able to be selective in the ones we choose to engage with. Management teams and cultures that are able to act as true stewards of the long-term interests of the business are few and far between, but when we do find them, they very much resemble what we find with family or foundation-owned companies – patience, resilience, and long institutional memories that form the backbone of high quality franchises.

  1. Excerpt from a meeting with the CEO of ASML and Stewart Investors.
  2. AMSL, (2018) Annual report, P89. Source: