The St Leger Stakes, established in 1776 is the oldest of the five Classics.
The last to be run, usually the second Saturday of September, it is also the pertinent part of the old adage, ‘Sell in May, and come back on St Leger’s Day’ where it was customary for aristocrats, merchants and bankers to leave the City of London for the countryside in the summer months. This year, it seemed as soon as Hurricane Lane had crossed the winning posts in first place, the UK markets, especially the FTSE 250 and Small Cap, started to lose their winning momentum and trace back down to their 200 day lines. The reason being Inflation, the wolf at the door of markets globally. Central bankers and economists have moved on from calling this transitory inflation, but now structural inflation; inflation that is embedded in the system and here to stay.
Central banks will start moving towards tapering and turning more hawkish, recognising that to quell the inflationary impact rates must rise. As fund managers, inflation is a risk that we must embrace and the best way for us to do this is through buying and holding quality businesses with high cash flow, strong balance sheets and pricing power.
Our best example of pricing power can be found in Diageo’s headline brand, Guinness. Diageo has been in the portfolio since 2000 and we have always rated the business’s management, ability to generate consistently strong returns through its portfolio of dominant brands with a loyal, global, customer base and pricing power. No more is this evident in the price of a pint of Guinness versus the Barclays Cost of Living Index that we have charted since 1899, where it was 1p, up to 2021, where it is £6.25 in our local Young’s Pub, the excellent Guinea Grill.
Since 1899, throughout two world wars, numerous market crashes and depressions, years of boom and prosperity, Guinness has been able to increase the price of their pints above and beyond the rate of inflation. Evidently customer loyalty, superiority of the brand, diligent management and cost controls allow Guinness to be able to stave off the inflation wolf at the door, raising prices and maintaining consistent margins.
Diageo isn’t our only holding with pricing power. Over September we added to Genus and Dechra Pharmaceuticals, both operating in the veterinary and companion animal space. One of Dechra’s primary drugs is for the treatment of Cushing’s disease in dogs, cats and horses and effective therapy for man’s best friend doesn’t have a maximum price. Owners will pay whatever is required to treat Rover the dog, Felix the cat or Fred the Shetland pony. Pricing power pays.