article , video 11-22-2016

The Art of Analyzing A Company's Moat

Portfolio Manager Steven McBoyle explains the distinctive element in his analysis of company moats—the addition of a predictive framework. 

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Steve Lipper: Many people analyze moats looking for companies with wide moats. What do you think is distinctive about our approach?

Steven McBoyle: Certainly moats are an overused term. Where we think we differentiate ourselves is effectively trying to look beyond the two-three-year period. A lot of this centers on not the fact that at a given point in time returns are attractive but rather are those returns going to be sustainable or grow?

So one effectively has to build in a mechanism or a framework that creates some sort of predictive value.

One of the frameworks that we've built is what we refer to as a "market map" and very simplistically, think of this as Porter's Five Forces marries up with profit pool analysis. So we'll go through the five forces, but most importantly what we'll do is on this given market map, we will depict all the constituencies that are at play in this given market.

We will assign or depict the profit pool per constituency and we will track the rate of return in that profit pool. What that does amongst many things is create, effectively, a predictive value as to which areas of this market map are getting stronger versus getting weaker. At the end of the day, the primary objective to all this is who is going to wield the greatest amount of pricing power for the longest period of time.

That is a bit of the art of what we do. I think it is a differentiating feature as we analyze moats.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of July 12, 2016 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) 

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