Select Equity Group employs an intensive and rigorous fundamental research approach to investing in what we believe are the world’s best businesses. We own businesses with growing streams of cash earnings; annual earnings per share (EPS) growth typically in excess of 10%; high or rapidly improving returns on invested capital; expanding barriers to competition; and clean or rapidly improving balance sheets. There are entire market segments that are unappealing to us at any price for a variety of reasons, including short product life cycles, commodity-based pricing, onerous regulatory frameworks or high capital reinvestment requirements.
Our analysts are members of a collective research team that supports all portfolios at the Firm. Our research team identifies and vets its own ideas through a disciplined, bottom-up process that often entails years of study before we make a core investment.
Select Equity’s research is conducted independently with a focus on developing fresh perspectives on companies or value chains. Our analysts do not read Wall Street research or speak to sell-side analysts or our counterparts at other investment firms except for limited purposes. We believe that our independence results in portfolios that are highly differentiated from those of our peers.
Analysts are generalists but focus on value chain analysis, studying suppliers, manufacturers, distributors and customers within specialized areas of the economy across geographies and market capitalizations. Our emphasis on detailed value chain analysis is driven by the multi-year holding period for most of our core investments. Our edge is in identifying competitive dynamics that have the potential to play out over three to five years, not in predicting earnings in the next quarter.
Qualitative fieldwork is an integral part of Select Equity’s research process. Fieldwork is conducted by a dedicated team of over 10 Qualitative Field Analysts (QFAs), who are former journalists, and sourcing specialists, who identify individuals who can provide useful insights on topics of interest, vet sources (including compliance reviews) and schedule interviews for QFAs and analysts. QFAs do not conduct quantitative analysis or make investment recommendations. We have compliance procedures to ensure that the Firm is not exposed to material nonpublic information or other information subject to an obligation of confidentiality.
Our investment process is primarily bottom-up, but we continually examine the macro environment, measure the potential economic sensitivities and risks of our investments and actively manage our portfolio to diminish their impact. In evaluating potential investment opportunities, we weigh downside risk more heavily than upside reward.
We build our investment universe by identifying great businesses without regard to current valuation in the belief that, with enough patience, the market will provide an opportunity to invest in every company at an appropriate valuation. We then embark on a rigorous process of primary due diligence including extensive qualitative and quantitative company and value chain analysis. This process may take years to complete.
Fully vetted businesses that meet the Firm’s stringent quality criteria are added to the “SEG 500,” our universe of what we believe are great businesses. Companies drop off when they are acquired or if the business fundamentals deteriorate. We continually question our assumptions and rigorously debate our conclusions to gain a deeper understanding of the risks and how best to measure and monitor them. From this universe, we build each portfolio by selecting our highest-conviction companies trading at the greatest discounts to our estimates of their intrinsic values.