As investors seek reliable companies in a tough market climate, they need to look for certain ‘personality traits’ that tend to indicate resilience over the longer term.
BNY Mellon IM considers these essential as points of differentiation from those businesses which tend to only enjoy bursts of growth over a relatively short timeframe.
“What sets some companies apart from others is their ability to generate wealth over long periods, not just in short phases,” said the US asset manager in a research note.
The anatomy of leading companies
Among the seven traits of long-term success in BNY Mellon IM’s view is being a pioneer. This enables a company to dominate the market it has created with other companies following in its footsteps.
Another component of success for leading companies is constantly developing new technologies – not just to fend off competition but also to increase their lead.
Healthcare companies are a good example of both of these first two traits. Yet brilliant innovation is not always about scientific breakthroughs, adds BNY Mellon IM.
“Regardless of whether it comes in the form of transformative medical procedures or the consistent advancement of everyday items, it is a key factor in long-term wealth creation.”
A third key trait is adaptability. The firm believes that if companies want to remain relevant, they must adapt quickly to shifting demands. “The best management teams understand this and build flexibility and agility into the structure of their business,” BNY Mellon IM explains.
Differentiation is another attribute that enables a company to stand out from the crowd. This typically takes a lot of investment and R&D.
Sustainability is a fifth trait that indicates resilience and long-term performance. This might come from committing large chunks of sales revenue to R&D, to drive innovation and product development.
Being able to deliver financial results is a critical piece of the puzzle when identifying leading companies. “Leaders do not just exhibit excellent characteristics, they deliver consistent results as well,” says the BNY Mellon IM research team.
Pricing power is a particularly attractive attribute, with return on capital critical in signaling a company’s ability to create value.
“Over decades of investing, encapsulating numerous recessions, we’ve learned that high return, growth businesses, which fund expansion internally, flourish during downturns,” adds the firm.
A seventh trait is inspirational management, given that great businesses are invariably the result of great leadership.
An example is a chief executive of a US-based global payroll provider who has been at the helm since 1999.
This individual, says the BNY Mellon IM team, has transformed the company by elevating its technology to the same level as its traditional sales and services business by hiring directors with technology backgrounds. Long-term investments and innovation centres are also part of his legacy.