What are you hearing from management teams as it relates to tariffs and the state of business?
The comments have been varied, as you can imagine, depending on the nature of the business. Companies that are asset-light or service-oriented, meaning they do not manufacture tangible goods, should be relatively unaffected by tariffs as long as their customers don’t experience a significant impact as well. For companies that do manufacture tangible goods and ship those goods across borders to end customers, you’ll likely see varying degrees of impact. Many of the companies we speak with and invest in implemented mitigation strategies during the last trade war in the 2010s. Things like diversifying the supply chain—not having a sole source for raw materials—and “local for local” manufacturing policies, in which products are made in the same geographic area as the end customers. These strategies should provide a degree of insulation compared to companies that may have a sole source supply chain or ship across borders.
How does the team assess macro threats, like the impact of tariffs, on the portfolio?
Whenever a shock like this happens, our first step is to look at what we own and assess the opportunities and threats. In this latest case with tariffs, we looked at the first order impact on revenue. Then we evaluated the impact it will have on the company’s customers. We then review the income statement to determine the impact on the business's cost structure. In other words, how sensitive is the company’s cost of goods to an inflationary impulse such as a tariff? Can they pass that pricing through or not? Will they have to absorb it in the margin structure? If they have to absorb it, how big of an impact will that be?
More broadly, our philosophy and process lead us to what we call “all-weather” companies. We don’t construct our portfolios based on any type of underlying environment. Rather, we want to invest in companies that can absorb a wide range of outcomes. Shocks like these are inevitable over time, and we want to invest in companies that can survive, thrive, and hopefully take market share during tough environments.
Are opportunities emerging, given the recent selloff?
The two areas of the market where we are finding incremental opportunities are U.S. housing and life science tools—both industries that have been hit with near-term headwinds. On some measures, the U.S. housing market is about as bad as it has been the better part of the last 10-15 years. There are many excellent businesses that offer attractive returns on capital and promising growth prospects, but are currently navigating the headwinds affecting their industry, including higher mortgage rates, low housing turnover, and similar factors. In our opinion, many of these stocks are attractively priced.
Within life science tools, there continues to be negative news flow surrounding the industry, whether it’s the NIH budget being cut or biotech funding problems. However, there are also excellent companies that we believe will become significantly larger in the future. They have attractive business economics, and they grow revenues in line with GDP, if not at some multiple of GDP. And this is where we like to lean into during times of uncertainty.