The “flywheel” of quality innovation

My key investing goal is, and always has been, sustainable growth. In a rapidly changing world, I believe the best road to enduring growth is to embrace change – participate in it and, in some cases, lead the charge. How does a high-quality company do this? I believe it all comes down to building and maintaining a strong culture of innovation.

A virtuous cycle

Quality is one of the keys to excelling in a fast-paced world. From my perspective as an investor in U.S. markets, there are three factors that define quality:

• Innovation
• Execution
• Reinvestment

If a company can consistently develop new products, gain market share and increase scale, it develops a margin advantage that allows it to reinvest in the business to continue the process in a virtuous cycle – the “flywheel” of innovation.

An innovative nation

I believe the U.S. is a future-aligned nation and the world’s primary “innovation engine.” Over the last 10 to 20 years, many of the most important developments in medicine, science, technology and, more recently, energy production have come out of the U.S. The innovation cycle often plays out over years, which leads us to hold companies in Trimark U.S. Companies Fund for long periods in order to capitalize on the capital investments the companies are making.

One thing I like to emphasize is that innovation can, and should, occur in any industry – not only in the stereotypical “tech” companies from Silicon Valley. For example, Wells Fargo & Co., a long-established, large-cap financial institution, has a solid innovation strategy in place for using technology to sell to their clients in a highly refined way. United Parcel Service, Inc. (UPS), a seemingly traditional delivery business with its familiar brown branding, is a logistics company – and logistics is a true technology game these days.

Once a company successfully develops and continually invests in a solid culture of innovation, the result is generally a “perpetual cash-generation machine” – with the capacity for continuous growth. Occasionally, a company may temporarily lose its way, fall out of the cycle and become undervalued because of an issue that the market might not fully understand. This is where we are able to find opportunity by fully understanding a company and its place in the innovation cycle. When a high-quality company is undergoing a rejuvenation phase, it may represent a great investment at a reasonable price.

Trimark U.S. Companies Fund is designed as a core holding – consisting of mainly large-cap companies with selected small- and mid-cap firms included as well. It is a concentrated portfolio that focuses on innovative companies with the capacity for sustainable growth – the approach I’ve used since I started managing the Fund in 1999, when it was launched.

Note: The above companies were selected for illustrative purposes only and are not intended to convey specific investment advice.