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ERROR: type should be string, got "https://www.barrons.com/articles/why-a-top-stock-fund-likes-ferrari-moodys-and-msci-51589972402\nMutual Fund Profile\nWhy a Top Stock Fund Likes Ferrari, Moody’s, and MSCI\nSarah Max\nMay 20, 2020 7:00 am ET\nBrian Yacktman, left, and Elliott Savage co-manage the YCG Enhanced fund.\nPhotograph by Bryan Schutmaat\nBrian Yacktman has no shortage of anecdotes about investment wisdom gleaned from his father, legendary value manager Don Yacktman. One memory that made a big impression was driving past a car dealership on the way to a baseball game when he was about 10 years old. “I asked my dad if he owns car stocks because, I thought, since the prices are so high they must be a good investment,” says Yacktman, 40. “He said, ‘Oh no, son, never own airlines or autos because they are terribly capital-intensive businesses.’”\nYacktman took that wisdom to heart, but the founder of Austin-based YCG Investments and co-manager of the $357 million YCG Enhanced fund (ticker: YCGEX) has developed his own style of investing. While he looks for quality businesses with high returns on tangible assets, his investment decisions hinge on whether companies have enduring pricing power in industries that are growing at least as fast as gross domestic product.\n“If you don’t have pricing power, you can’t maintain sustainable high returns on capital,” says Yacktman, who credits his co-manager, Elliott Savage, with helping him bring that philosophy into focus. Taking it a step further, that pricing power is due largely to strong network effects—whether it is tied to information, such as with MSCI (MSCI), or brand affinity, such as with Hermès International (RMS.France). “The bigger the network gets, the more value it provides to all of its participants,” says Savage, 40.\nGlobally, there are only about 100 businesses that have these qualities, the managers say. Textbook examples of what they call “global champions” include Alphabet (GOOGL), Facebook (FB), Mastercard (MA), and Microsoft (MSFT). In many cases, these companies are monopolies or duopolies whose customers are willing to pay a premium or absorb price increases because the goods or services are difficult to substitute.\nYacktman always had an interest in investing, but knew he wanted to make it his career after graduating from Brigham Young University, completing a church mission, and returning to manage an investment portfolio he had funded with his own savings and contributions from his dad. He completed his M.B.A. and worked with his father and brother Stephen at Yacktman Asset Management before striking out on his own in 2007. Savage, meanwhile, was working at a long-short hedge fund in Dallas when an internet search related to a stock owned by Don Yacktman piqued his interest in YCG. He eventually called and proposed working with YCG on a trial basis. Three months later, he joined as a partner.\nIn late 2012, the co-managers launched the YCG Enhanced fund, which has returned an average of 9.1% a year over the last five years, better than 92% of its large-blend peers. (Note, the fund’s 1.19% expense ratio is higher than its category average.) The strategy behind it has an annualized return net of fees of 10.8% since its 2008 inception, through the end of April, versus 9.5% for the S&P 500.\nThe “enhanced” part of the name refers to an options strategy that comprises around 10% of assets. Selling cash-secured puts on stocks they want to own and selling covered calls on stocks they want to trim can potentially enhance returns with reduced risk.\nThe fund initiated its position in Moody’s (MCO) in 2016 via options, and in 2017 bought shares outright. The global credit-rating industry is highly concentrated, with Moody’s and Standard & Poor’s controlling an estimated 80% of market share. Companies that need a credit rating to issue debt are willing to pay a premium for a Moody’s rating, says Yacktman, because not having that rating will cost them more—an estimated 30 to 50 basis points annually on debt outstanding. Investors count on the consistency and familiarity of these ratings.\nAt the same time, corporate debt issuance—and in turn ratings—is growing as more global companies turn to capital markets for financing. “The company is effectively networked across time,” says Yacktman of century-old Moody’s. “No startup can replicate that.”\nFinancial-services companies recently accounted for roughly 42% of the fund’s holdings. While the fund owns some large banks, many holdings are what the managers call “financials lite.” These companies’ earnings aren’t predicated on credit risk but on services and subscriptions—and they can grow at a high rate with very little additional capital.\nYCG Enhanced\nNote: Holdings as of March 31. Returns through May 18; three- and five-year returns are annualized.\nSources: Morningstar; YCG Funds; Bloomberg\nThis is the case for MSCI, which is an index provider that is benefiting from the growth of global wealth over time and the continued use of index investing. Two key sources of revenue are subscriptions to access this data and licensing to use the names of its 160,000 indexes in exchange-traded funds and mutual funds. “They essentially act as a toll taker on global wealth over time,” Savage says.\nFashion trends may be fleeting, but true luxury-goods companies are also enduring beneficiaries of growth in global wealth. The status and quality associated with these brands is virtually impossible to replicate, even if the products themselves can be. YCG Enhanced holding Hermès International (RMS.France) demonstrates that.\n“Seven of the 10 most expensive bags ever sold are Hermès,” says Savage. He ran the numbers on the value of the coveted Birkin bag: It increased 5.4% a year over the past 36.5 years, versus 3% for inflation. When Hermès reopened its flagship store in Guangzhou’s high-end Taikoo Hui shopping complex in April, it grossed $2.7 million in a single day.\nYacktman has heeded his dad’s advice to never buy autos or airlines, with one exception: Ferrari (RACE), which the fund bought this spring. Its 2019 gross margins of 52% are two to three times that of other major auto makers, while limited distribution and wait lists translate to pricing power and stability, even in tough markets. “During the Great Recession, sales were down just 4%,” notes Savage, who says Ferrari can boost revenue and earnings at a double-digit rate over the long term, with little additional capital. “That isn’t a car company. That’s a luxury-goods company.”\nBrian Yacktman has no shortage of anecdotes about investment wisdom gleaned from his father, legendary value manager Don Yacktman."