Memo #5: Is Burberry going to have a brat summer?

Also, why I like toll booths

It was a better April for markets — the US market has rallied somewhat, though I’m quite cautious of saying “war is over” — I think the consumer is in a tight spot, especially your regular Joe who purchases everything from Temu and Walmart and so on. I’m increasingly focused on financial infrastructure, which tends to do well regardless of economic conditions. For instance, Moody’s and Standard and Poor’s (SPGI) both are needed to rate bonds and debt products, while SPGI has a franchise on its index licensing products (i.e. the S&P 500). MSCI Inc has a similar stronghold on index products — for every dollar that is invested in any index with “MSCI” on the tin, it gets paid.

The attraction of owning companies like this should be obvious — it’s the closest thing to “mandatory” for most of the world’s financial infrastructure. In particular the shift towards passive indexing benefits both MSCI and S&P (I’m well aware of the irony — an active money manager making money off the shift to passive — it’s deliciously ironic). As owners of units in the Elevation Capital Global Shares Fund, you can sleep easy knowing that for the foreseeable future MSCI and S&P will continue to be paid a royalty the indexes they license out, and the continuous expansion of capital in the world only serves to benefit them.

Continuing on this theme, it’s worth pointing out a few oddities — CME, Plus 500, CMC and the London Stock Exchange. CME is America’s largest futures exchange. Every possible derivative product is on there. Plus 500 and CMC are CFD providers (in other words, they benefit a lot from the current volatility we are experiencing). Plus 500’s margin is a whopping 38%, which just tells you have capital light these business models are. The London Stock Exchange is mostly a data provider these days — though it is benefitting from their recent uptick of inflows to UK equities. The LSE has a lot of proprietary data, and as Mike Bloomberg can tell you, owning that proprietary is like owning a goldmine (there’s a reason Microsoft owns ~4% of the exchange).

We have always talked about owning “Toll Booths” (in fact, Chris and I gave a presentation to the Northern Club back when I was an analyst here on the subject of toll booths). These financial infrastructure providers strike me as some of the strongest toll booths in the world — at some point, everybody has to pay the troll under the bridge.

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London Calling

Another point worth talking about is the UK. Values between UK companies and US companies have been diverging significantly for some time.