• The fund’s return for Q4 2021 is 13.2% compared to S&P index return of 10.7%.
• The fund’s return for one year is 34.4 % compared to S&P index return of 27.0 %.
• The fund’s annualized return since inception is 11.8% compared to S&P index return of 13.8%
• The assets under management are US$ 13.44 million with 4% held as cash.
• We have 20 companies in the portfolio, with top 10 holdings accounting for 70% of the portfolio.
• Top 3 portfolio companies, comprising 33% of the portfolio, have given more than 5 times returns
• We invested in 3 businesses in the year and did not sell any stock.
I do not want to oversimplify their very complex operations, but just want to share some strengths of these businesses that have given them the edge and in fact created an advantage for them to perform better than their competitors.
• Mettler Toledo’s (precision lab equipment manufacturer) end market and geographic diversification helped mitigate the impact of shut down across the globe. The vast access to industry data from its large installed base (largest in the industry) enabled it to shift sales and marketing focus to the most promising end markets early. Furthermore, due to its unmatched resource of over 3000 service technicians paying regular visits to customers’ sites to re-calibrate their lab equipment, Mettler Toledo has an important competitive advantage. This stream of work not only provides recurring revenue, but technicians can also leverage their presence at customers’ sites to cross-sell: especially advantageous during pandemic with new vendors restricted from these sites.
• Accenture’s early move to digital cloud and security enabled it to remain ahead of its competitors in this capability and during pandemic as its clients accelerated their move to digital, Accenture is much better positioned than many others to gain new clients.
• CBRE faced a big shock as its office leasing business was servery impacted during pandemic. However, it fared much better than its competitors due to its highly diversified property types, geographic market coverage and quality of clients. The negative effect of office space leasing was tempered by its large and growing presence in industrial, data centres and multifamily apartments; 90% of its 100 largest clients purchased four or more services in 2020. Its large global client base gave further resilience to the business as they were more likely to continue leasing despite pandemic, as reflected in its record free cash flow generation, a healthy balance sheet with a net cash position and$4.6 billion of liquidity.
• Robert Half’s differentiated business model of staffing and consulting (Protivity) helped temper the effect of layoffs in staffing business. Its Protivity business continued its double-digit revenue growth in the year and the unique blend of consulting and staffing solutions was at an all-time high with 82% year-on-year growth by Q4 2020. In addition, the nature of its staffing service of more resilient finance and accounting jobs, placed it much better than many of its staffing competitors.
• Fastenal has evolved its distribution channel by operating close to its customers through its Onsite presence and dispensing Fastenal and other industrial products through its vending devices. During the lockdown, when store-based distributors shut down and suppliers were not allowed in customers’ sites, Fastenal could continue serving them uninterrupted as they were considered extension of the customers supply chain, replenishing the vending devices. Furthermore, the automated inventory system means no person is required to check the inventory, an added advantage during the pandemic and a significant differentiator from its competitors.
• CH Robinson competitiveness as a third-party logistics provider was tested during the extremely volatile supply and demand environment. Its technology investments gave it significant advantage – for instance there was a 30% increase in fully automated truckload bookings compared to the fourth quarter of 2019 and its capability of automating the spot market opportunities resulted in double-digit growth in spot market shipments and eight consecutive quarter of market share gains.
• O’Reilly, the auto-parts distributor, had the best year in its history – its customers are car owners and repeat business can be established only if repair can be faster than the competitors. This is possible only if they have the right parts available for quick replacement of auto parts. Over the years, each store in its chain has understood the customer profile / car types for the local area. Each store keeps unique inventory tailored to the local market based on vehicle registration data, market demographic information and customer purchasing patterns, enabling immediate supply of products in highest demand. The pandemic further created an advantage for O’Reilly- while the supply chain constraint affected several of its competitors, its well forecasted inventory sourcing capability ensured availability of right auto-parts for its customers even at the most challenging times.
• Bookings.com faced the biggest disruption to modern global travel the world has ever seen. Its management took aggressive cost cutting steps by reducing brand marketing by half and yet managed to book 355 million room nights and remain profitable. The strength of the Bookings brand equity truly gave it a competitive edge.
A moat is something that provides protection to a castle in times of attack and our portfolio companies have proven they have a strong, defensible moat to weather any attack and come out as a winner.
• The fund’s return for Q3 2020 is 10.7% compared to S&P index return of 8.6%.
• The fund’s return for one year is 23.4 % compared to S&P index return of 12.8 %.
• The assets under management are US$ 10.33 million, with 8% of portfolio currently held as cash.
• We have 17 companies in the portfolio, with top 10 holdings accounting for 86% of the portfolio.
• We sold one company in the quarter and invested in one new business.
A recent article in Financial Times with the above heading talks about how Covid-19 has not just exposed existing inequalities in the society but exacerbated them too. The articles talk about the divergence in people’s experience during the lockdown. The more affluent have felt the economic impact much less and have probably been better off if they have assets invested in equity, compared to those lacking “economic capital” whose conditioned has worsened significantly as several thousand have lost their jobs or been furloughed. Even the social impact has been quite varied with some struggling with mental health over this period, and others cherishing this rare, close family time. People with supportive friend and family networks, or “social capital” have been able to maintain ‘business as usual’ during the lockdown.
According to BankruptcyData.com, a record 45 companies with assets of more than $1bn have filed for Chapter 11 bankruptcy this year, compared with 38 for the same period of 2009 during the depths of the financial crisis and more than double last year’s figure of 18. The restaurant, construction and retail industries were some of the hardest hit due to the lockdown, with century old names such as Neimus Marcus (a high-end retailer) JC Penny (a mass market chain), Hertz (a car rental company) and Brooks Brother (an office suits maker) announcing bankruptcy. Several of these failed within just a few months of the government mandated lockdown, and their inability to withstand this (undoubtedly huge) shock could be pinned down to just one factor- a large amount of debt. The unprecedented closure dried up their cash generating ability, resulting in an inability to payback the interest’s dues and quick failure. Of course, their highly capital-intensive retail operation and the intense competition faced from online stores added further to their downfall.
At Drona, the process of selection is highly skewed towards avoiding risk and therefore, our portfolio companies are mostly debt free or with minimum leverage. In addition, we closely look at their cash flow generation capability. This helps ascertain their ability to turn inventory as well as the ability of their customers to pay them for their products/services. At the end of last quarter, the top ten portfolio companies businesses generated similar cash flow compared to a year ago and most of them had free cash flow (operating cash flow – capital expenditure) greater than their net income in the quarter. Their exceptional ability to generate cash in the toughest of environments clearly set them apart. For these businesses, it seems almost like business as usual, as they are able to invest back in their businesses and in fact use this opportunity to strengthen their market position further while several others are struggling just to survive.
• The fund’s return for Q4 2019 is 9.2% compared to S&P index return of 8.4%
• The fund’s return for the year 2019 is 20.3% and its annualised return since inception is 7.6%
• The assets under management are US$8.67 million, with 2.9 % of the portfolio currently held as cash
• There are 18 companies in the portfolio, with the top 10 holdings accounting for 83% of the portfolio
• We invested in one new stock in the quarter
I recently read that Google Health has developed an AI system that can detect breast cancer more accurately than a radiologist. Mammograms are known to be imperfect at screening, failing to detect about one in five breast cancers, and giving more than half of all women a false positive. In addition, the gap in the availability of radiologists makes the cancer-screening service unsustainable, prompting this initiative. Two things stood out for me: firstly, how technological disruptions in each industry are challenging the relevance of products and services in the long run; secondly, how far Google has expanded beyond where it started. Who would have ever thought ten years ago that Google: a search engine company, could innovate an advanced healthcare product. These points are of course related. Google has ventured beyond its core business because it understands it needs to be disruptive to remain relevant.
We seek to invest in businesses with proven historical competitive advantage and stay invested in them for the long-term. Therefore, for our investment strategy to be successful, it is imperative that the businesses in our portfolio remain relevant in the long run, and that they are leaders of disruption in their industry. This is possible only if these businesses have the foresight to understand the changing needs of their customers as well as the agility to see it as an opportunity to lead the innovations, rather than a risk to their existence. In this letter, we want to look back at some of the strategic decisions taken by our portfolio companies over the years and their critical role in making them robust and therefore our investment strategy successful.
• The fund has had an annualized return of 9.2 % since its inception in June 2012.
• The fund’s return for the year 2017 was 22.10%, 270 basis points higher than S&P index return of 19.4%.
• In the fourth quarter of 2017, the fund returned 8.9%, 270 basis points higher than S&P index return of 6.2%.
• The assets under management are US$ 7. 2 million, with 0.5 % of portfolio held as cash.
• Currently we have 19 companies in the portfolio, with the top 10 holdings accounting for 87% of the portfolio.
• We invested in one new company in the quarter and four in the year.
This year marks five years since the inception of Drona Capital and we are pleased with the strong brands of businesses that we have built in our portfolio. Most of the companies in our portfolio are market leaders in the industries they operate in and have continued to maintain and grow their competitive advantage over the years. We seek to invest in companies that can withstand the pressures of time: high-quality businesses that have superior financial and operating performances and sustainable competitive advantage while operating in stable and attractive industries. We invest in them only when we can buy at a reasonable price and intend to stay invested in them for a very long time (ideally forever).
This year I ran my first half-marathon and it has been a great journey of learning: building confidence, stamina, and discipline. The journey of investment has not been very different: like long-distance running, long-term investment is a test of temperament and ability to stay disciplined. Sometimes we have run out of breath – we have sold 7 businesses since inception and in retrospection I think it was a mistake to sell most of them – but over the years, we have learnt how to pace ourselves well.
Avoidance of both financial and operational risk is a key part of our strategy and we have followed this discipline very strictly – most of the companies have negligible or no long-term debt and none of the companies have customer concentration of more than 10%. In addition, the fund itself is well diversified in terms of industry and geographical exposure.
Most industries account for ~ 10% of the Drona fund. Transportation industry has an exposure of 30% but this is an industry with broad range of companies such as Cummins, a manufacturer of diesel engines and CH Robinsons, a third-party logistics provider. We also have high geographic diversification as most of our companies, while listed in the US, have significant operations outside of the US – 37% generate more than 50% of their revenues abroad while another 26% bring in 25-50% of their revenues from overseas business.
As a fund, we have chosen not to invest in the trendy, “high- growth” technology companies. Instead, our investments are in “boring” industries, the unseen survivors, which have existed for decades and have demonstrated not “spectacular” but “consistent” growth. At times, it has been tough not to follow the crowd, but we are proud that we have stuck to our strategy for so long, and we are confident we will maintain it for years to come.
In this newsletter, we will discuss our new investment in Papa John’s and provide you with update on three of our portfolio companies: Accenture, Thor, and Varian.