Over the last 12 years, since launching the Burgundy European Equity Fund, the European market has declined by 1.6% per year, turning one dollar into $0.82 for the index investor,(1) while our European Equity Fund earned more than 7.8% per year and turned one dollar into $2.53.(2) We earned these long-term results through a 12-year period with three big storms: the Tech Crash of the early 2000s, the Great Recession of 2008 when we did incur significant temporary losses, and currently we’re part-way through the Euro Crisis.
Which brings me to my topic for this post (and for more to come): I want to explain to you how Burgundy has navigated the storm in Europe by earning good returns in difficult times in the past, and how the portfolio is positioned for the future. Burgundy’s proven investment philosophy and rigorous research process are akin to having a robust ship with reliable navigation equipment. It allows us to get our valued passengers to far-off destinations safely, even in bad weather, although the worst of storms sometimes cause short delays in reaching that destination.
The first reason for our return mentioned above is that we benefit from strong profit development of the great companies (and managements) in our European portfolio. We let the companies we hold for the long term generate value for us.
The best way to demonstrate this is to look at the profit trend of our current portfolio companies over the last five years, through the Great Recession and recent Euro Crisis.
The bar chart shows the average operating profit margins of all our portfolio companies. What you see is how high and how resilient they are, fluctuating within the 18% range regardless of recession, significant commodity cost increases or exchange rate fluctuations.
The numbers along the top are the growth in annual operating profit. You’ll notice attractive growth in profits most years through this difficult period. But perhaps the most notable number comes from 2009, when operating profits of our current portfolio companies declined by only 1% – the worst year of the recession. If you happened to be worth €860 billion, you could afford to buy outright all of the companies held in Burgundy’s European portfolio. In the middle of the 2009 recession when your operating managers reported this 1% drop in profits, I don’t suspect that you would have broken a sweat. You definitely would not have wanted to sell your “über holding company” at a big discount. Of course, the stock market did offer many of these companies at a big discount during the recession, despite their resilience, and that is why big downturns are a huge buying opportunity for the long-term investor who focuses on company fundamentals.
It’s also worth noting that the Western European sales of our portfolio companies have not been the disaster that the economic news headlines would imply. Revenues in Western Europe were down 1% in 2009, up 2% in 2010, and up over 4% in 2011.
Good companies survive poor economic conditions. So, if you want to successfully navigate the storm, make sure you’re sailing a robust ship with proven navigation methods.
In upcoming posts, I will discuss two more methods of navigating the storm in Europe: avoiding shipwrecks and making decisive purchases at opportune times.
(1) – MSCI Pan-Euro Index
(2) – As at June 30, 2012