HCR Methodology

Our starting point is a simple observation: over long periods, a relatively small number of companies account for a disproportionate share of equity market returns. Most companies generate acceptable but unremarkable results, while a minority create substantial shareholder value over many years. Our investment process is designed to identify that minority.

We focus exclusively on large North American and European companies. The universe is deliberately narrow, which allows us to spend considerable time understanding each business and the environment in which it operates. We are less interested in forecasting short-term earnings than in understanding how a company interacts with economic, technological, political and social developments, and whether those interactions are likely to strengthen or weaken its competitive position over time.

When evaluating companies, we look for three characteristics. First, the ability to adapt to changing circumstances. Industries evolve, regulation changes and technologies emerge; we prefer businesses that have demonstrated an ability to adjust successfully. Second, we look for some form of durable competitive advantage that protects profitability and market position. Third, we seek evidence of pricing power, as this often indicates that a company provides products or services that remain valuable to customers even when costs rise.

The portfolio is concentrated, with a maximum of 25 holdings. Concentration is a consequence of our research process rather than an objective in itself. If only a limited number of companies meet our criteria, we prefer to allocate capital to those businesses rather than broaden the portfolio for diversification alone. As a result, portfolio turnover is generally low and investments are typically made with a multi-year horizon.

Risk management begins with understanding the underlying businesses. Rather than relying primarily on statistical measures of risk, we focus on business risk: competitive threats, changes in industry structure, management quality, capital allocation decisions, regulatory developments and balance sheet strength. We believe that a detailed understanding of these factors provides a more useful assessment of risk than short-term share price volatility.

ESG considerations are integrated into the research process rather than treated as a separate screening exercise. For each company we conduct our own assessment of environmental, social and governance factors and evaluate how management balances the interests of shareholders, employees, customers, suppliers and broader society. Sustainability considerations are incorporated because they can materially affect long-term business performance and risk. Companies with sustainability risks that we consider excessive are excluded from the investable universe.

Ultimately, our objective is to build a concentrated portfolio of businesses that combine durable competitive positions, pricing power and the ability to adapt to a changing environment. We believe that maintaining a deep understanding of a limited number of companies provides a stronger foundation for long-term investment decisions than broad diversification across a large number of holdings.