Masts, manufacturing and meetings – 2021 so far in the global smaller companies universe
World in Motion – Global equities blog

Masts, manufacturing and meetings – 2021 so far in the global smaller companies universe

One of the many joys of investing in smaller companies is that we get to meet a wide range of interesting businesses that most people haven’t heard of.
We are always flush with fantastic ideas on which we’ve collaborated with our regional Smaller Companies teams, and we have bought a few of these over the last quarter. JTOWER provides shared mobile communications infrastructure in Japan for the country’s various mobile networks. After researching the company for some months we were satisfied that it fulfilled our focus on long-term, high-quality growth. One of the interesting things we learned when doing this is that there are no established cell tower businesses in Japan. Such companies tend to align well with our sustainable competitive advantage framework given relatively high barriers to entry, a high rate of technological advancement and integrated customer relationships. Hence our positions in Cellnex and INWIT in Europe. But in Japan, mobile carriers traditionally built their own towers to try to differentiate based on mobile network coverage. This is not a particularly prudent use of capital and leads to a lot of replication. With the rollout of 5G, which requires a higher density of towers versus 4G, the Japanese government pushed for a towers business to help improve efficiency. JTOWER’s traditional business had been providing shared mobile communications equipment in large buildings such as train stations. But with these wider industry developments the company is looking to build out its tower network, supported by telecommunications company NTT, which has taken an equity stake in the business. It is early days, but the opportunity to build Japan’s leading tower network and convert this into high returns on its capital over time is extremely appealing: a true fit of our investment philosophy.

Another name is Simpson Manufacturing, which makes structural connectors used in wooden frame homes in the US. We established this position at the start of 2021 and, in our view, Simpson is a hidden gem waiting to be uncovered by the market: dominant in its niche – it has built up more than 70% market share¹ – but with very weak analytical coverage. Its products are critical to the structural integrity of a home and are often approved by building code evaluation agencies – a strong barrier to entry. Another point of note is the cost of these connectors: around $1,000, against the overall average cost of building a home at around $450,000. It is not a huge priority for a builder to switch to something that is, say, 25% cheaper if it would require them to change building plans and make sure it still meets code, especially when it relates to a relatively low-cost item critical to the structural integrity of the home they are building. A combination of strong brand loyalty (the company works closely with architects and engineers to make sure its products are specified in building plans), engineering focus and customer service has enabled the company to build a strong competitive position within this niche, which has yielded strong pricing power. One of the things I look for in high-quality businesses is the ability to raise prices in inflationary environments and maintain them in deflationary times – and that is exactly what Simpson can do.

In a relatively concentrated portfolio of best ideas, the other side of the equation is selling businesses. Sometimes, this is because we see a deterioration in the company’s competitive positioning, or because of valuation, or that simply the company has grown above our upper market cap limit of $10 billion and reached its price target. Nordson is an example of the latter. We were holders of the company since 2018. Nordson is a manufacturer of adhesive dispensing systems and, like Simpson, had poor analytical coverage, dominated its niche and had strong pricing power. The company crossed the $10 billion threshold last year and reached our price target during Q1. At this point we decided to sell.
Q1 was another busy month in terms of corporate access. Working from home has meant a lot more companies offering meetings since they don’t have to travel. I attended around 50 such meetings across a broad range of geographies and sectors, from Finnish pet food stores to fine wine brands. One of the more interesting meetings was with the new CEO of Ritchie Brothers Auctioneers, the largest auctioneer of used industrial equipment globally. Think Sotheby’s or Christie’s but excavators instead of Picassos. One of the most interesting takeaways from the meeting was the company making better use of data. Clearly, from years of selling used industrial equipment it has built up an unrivalled database, which it is now exploring ways of monetising.
As we move into Q2, it will be business as usual for us. Markets have been turbulent of late, with reopening optimism and inflation expectations driving style and sector rotations. But we remain laser-focused on the long-term: holding the 70-90 companies with the strongest, most sustainable competitive advantages we can find.

The mention of any specific shares or bonds should not be taken as a recommendation to deal.

15 June 2021
Share on twitter
Share on linkedin
Share on email
June 2021
Share on twitter
Share on linkedin
Share on email

1 As of April 2021

Important Information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA:  Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).

For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.

For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Related Blog Posts

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.