- Mike Tian said an adaptation of Warren Buffett’s investing philosophy helped make the WCM Focused Emerging Markets Investor Fund the best emerging-markets stock fund of the past five years.
- Buffett has long prized companies with major competitive advantages, or “moats.”
- Tian says he and his comanagers invest only in companies that are making their moats bigger.
- Competitive advantages change constantly, and finding companies that are improving is better than buying them based on concepts like valuation or sector profile, Tian said.
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Hundreds of years ago, a moat must have seemed like a “set it and forget it” proposition: Once you built one around your castle, you were in great shape. Things are a little more complicated now.
Big advantages, or “unbridgeable moats,” have been a major part of Warren Buffett’s famed investing philosophy over the years. The moat is his term for the barrier a company has developed that its peers are nowhere close to overcoming, an edge that will last for years on end.
The concept has worked so well for Buffett that other experts have put a lot of effort into understanding and standardizing how moats work. And Mike Tian says one key to his success is taking the concept one step further by targeting companies whose leads are growing.
“It’s really all about the direction of that competitive advantage, that economic moat, as opposed to the moat itself,” he told Business Insider in an exclusive interview, adding that for the best companies, “Their moats are deepening, widening.”
It’s an approach that has worked very well for Tian and his comanagers at the WCM Focused Emerging Markets Investor Fund. According to Kiplinger, their fund is the No. 1 emerging-markets stock fund of the past three and five years. Over the past 12 months, it has ranked third.
Tian says that some investors are satisfied if they see a moat exists, but that doesn’t go far enough. He and his fellow managers want to get involved only with companies that are building wider and deeper moats.
The idea is that if that company is standing still relative to its competition, it’s eventually going to lose its edge to a more determined rival. By the time that happens, the rival might also prove to have been a better investment.
“We think the mistake that a lot of people make is that they think of competitive advantage as relatively static over time, or at least being static over a time period in which an investor’s likely to care about it,” he said.
But competition is constant, and that makes it dangerous to make guesses about how long a company’s old advantages will last.
“The worst thing you can say at our firm is, ‘It’s still going to be a good company,’ or, ‘It’s still a good company,'” he said. “We would much rather invest in a great company that’s going to become a greater company, or a good company that’s going to become a great company down the road.”
In other words, finding improving companies and expanding moats is a more effective way of discovering successful companies than investing around valuations, sectors, or popular themes. And after a sterling half-decade, it’s the way the comanagers intend to stay ahead.
