Analyzing Chris Hohn’s Investment Strategies: High Barriers and Risks
Identifying Risks in a Portfolio
In a recent interview, Chris Hohn, founder of The Children’s Investment Fund and widely recognized as one of Europe’s premier investors, emphasized the importance of identifying companies with significant barriers to entry. This insight comes just as his 13-F filing to the Securities and Exchange Commission (SEC) revealed that the largest U.S. stock holding in his portfolio is General Electric Aerospace (GE).
High Barriers to Entry and Their Importance
Hohn pointed out that investments in sectors where the hurdles for new competitors are exceptionally high can lead to sustainable profits. The aircraft engine manufacturing space, where GE and its partner Safran operate, exemplifies this principle. “It’s so complicated to make this product that there have been no new entrants for 50 years,” Hohn remarked. He also mentioned that the significant profits derive from spare parts after installation, creating additional barriers that protect incumbents.
The Role of Network Effects
Hohn also brought attention to the significance of network effects in investments by highlighting Visa (V) and Meta Platforms (META) as examples where established companies hold a distinct advantage. He pointed to TCI’s increased stake in Microsoft (MSFT) as a calculated move. Citing the competitive landscape of video conferencing, Hohn argued that Microsoft’s bundling strategy with Teams to counter Zoom (ZM) illustrates the power of incumbency.
Assessing Alphabet’s Position
Interestingly, in a stark contrast to Hohn’s bullish outlook on GE Aerospace, he labeled Alphabet (GOOGL) as “maybe our most risky investment.” While Alphabet supports its valuation with robust segments like YouTube and cloud services, Hohn cautioned against the potential fragmentation of its search business. This admission underlines the fluid dynamics within tech investments, which can be precarious given the rapid pace of innovation and consumer behavior shifts.
A Long-Term Perspective on Investments
One of the critical strengths of Hohn’s investment philosophy is his commitment to long-term holding. The average duration his fund holds investments spans eight years, a stark contrast to the less than one-year holding period typical of institutional investors. This long-term strategy enables TCI to ride out volatility and capitalize on the intrinsic value growth of fundamentally sound companies.
The Case for Moody’s and S&P Global
Hohn shared insights on Moody’s (MCO), which he acquired both during the global financial crisis and again afterward—underscoring the stock’s potential for sustained growth at a rate of 10% over the last century. TCI’s holdings in S&P Global (SPGI) similarly highlight a focus on firms with predictable revenue streams, crucial in an era of uncertainty.
Avoiding the Pitfalls of Growth for Growth’s Sake
In his investing ethos, Hohn warns against chasing mere growth, pointing to the airline industry that, despite a century of operation, has struggled with “profitless growth” owing to low barriers to entry. This discernment allows for a more discerning approach to evaluating the potential of various sectors—one that can be particularly useful for conservative investors wary of market volatility.
Conclusion: A Cautious Approach to Investment
As we navigate the complexities of today’s market, Hohn’s perspective reminds us of the fundamental principles guiding successful investment strategies. High barriers to entry, network effects, and a long-term view are essential considerations for anyone looking to build a resilient portfolio. While Alphabet’s risks warrant caution, sectors like aerospace underscore the potential rewards of focusing on companies that not only withstand competition but thrive within their industries.
In a time when many investors are looking for flash-in-the-pan growth, Hohn stands as a testament to the soundness of traditional investment principles. Those who heed his insights could find themselves better positioned in an unpredictable economic landscape.
