Into the deep

April 26, 2017 | Kara Lilly Print

Our team has recently been engrossed by peculiar Instagram posts from Roman Fedortsov, a trawler from Murmansk—a port on Kola Bay in Russia’s extreme northwest. His posts are full of strange and somewhat horrifying creatures pulled from the ocean’s depths. These sea creatures are bold reminders of just how much of the ocean’s depths remain a mystery.

Deep sea exploration is an area of fascination within our research team. While much of the earth’s surface has been explored, most of the ocean remains uncharted. Indeed, we keep going into the depths only to discover new species; strange creatures like tardigrades, frill sharks or anglerfish. In an era where we assume so much is known, there is something humbling in this.

As investors, we can learn much from the spirit of deep sea exploration. It is our job to move beyond well-lit and well understood areas, and dive deep into the unknown. Whether it is exploring a new business model, technology, or country, we must be willing to pursue areas of the market that are dark to us if we are to gain advantages. In our team, one of the best examples of the pursuit into the unknown comes from “The Lab.”

The Lab at Mawer is comprised of a team within research that applies statistical rigor to important questions about markets. Inspired by the exceptional work of Bell Labs, the Lab seeks to better understand factors influencing value creation and to use those insights to identify market opportunities.

For example, in the past year the Lab has considered the following questions:

  • What percentage of sell side analysts appear to demonstrate skill in stock picking?
  • Historically, what countries had the most wealth-creating businesses in the world?
  • Historically, which industries are the most wealth-creating? Wealth-destroying?
  • Historically, which parts of the Mawer research process add the most value? Which parts add the least?

By applying statistical rigor to these questions, which previously had only stories for answers, we move further into uncharted territory in an attempt to shed new light on our surroundings.

Clearly each voyage into the unknown is not going to necessarily yield results; however, through our ongoing exploration, we open ourselves up to the possibility of transformative discovery.

It’s a vast ocean.


Comments

  • Hugo 27/04/2017 7:39am (15 months ago)

    Where do you get the information for research such as finding which businesses create wealth for a country?
    What are you using as a measure of wealth-Book value growth?

    • Justin Anderson 02/05/2017 1:41pm (15 months ago)

      Hi Hugo,

      In answer to your two questions:


      - We consider return on capital minus cost of capital as a proxy for wealth creation. To get economic value-add (EVA) we multiply this result by the company’s total capital. To estimate the result for each country, we look at where the company is listed and where the company’s core operations are located. This approach will overweight the USA, for instance, as the large tech companies that make up so much of the wealth creation in fact operate globally while for our purposes they’d be considered US companies. This distortion is probably fairly minor and offsets itself to some extent as the distortion goes in both directions.


      - We measure gross investment capital to measure capital growth and EVA. This would roughly approximate to Gross PP&E plus financial capital.

  • james 29/04/2017 8:25pm (15 months ago)

    great questions to ask. i would love to know what Mawer came up with as answers.

    • Kara Lilly 01/05/2017 9:37am (15 months ago)

      Hi James,

      Some of the answers will be posted on this blog over time, while others will remain in the team (as they will contribute to the value that we can provide our clients). You can expect to see some of the Lab's research popping up here (and good to know it would be something you'd want to see).

      Kara

Join the Discussion

Stay Curious

Subscribe to receive our latest insights and quarterly updates.


Popular Posts

The portfolio is the hedge

(Not) boring finds for this week – May 30, 2018

Southern exposure in the North: When Canadian small-caps expand into the U.S.

The skier’s guide to portfolio risk management

Enduring themes for volatile times


Categories

(Not) Boring Links

Business Models

Investment Approach

Mental Models

Risks

Stay curious

Subscribe to receive our latest insights and quarterly updates.