Siki Mgabadeli from SAFM Market Update interviewed Adrian on the "Two key ingredients for long term company survival" study which was released recently. The keywords are "Agility" and "Absorption", .

The podcast is available by clicking the image on the right.

SIKI MGABADELI: We’re looking at some key ingredients for long-term company survival, looking at how companies and businesses can overcome a poor business environment. Adrian Saville is chief investment officer at Cannon Asset Managers, and this is something that he’s been looking at quite closely.
   Adrian, thanks so much for your time this evening. Firstly, if you look at the current business environment how would you characterise it?

ADRIAN SAVILLE: If you look at the numbers out just in the last couple of days, headline macroeconomic figures, there’s a tiny bit of good news in the form of, for instance, the relatively tame consumer price inflation. Having said that, the raft of headline macro-indicators is, whilst not depressing, certainly of a tough landscape make-up, and doesn’t make for great reading.

SIKI MGABADELI: And as Cannon Asset Managers you looked at more than 1 000 companies as part of your research, looking at which have survived downturns. And I think the period you were looking at was 1997 to 2013. Just take us through what exactly you were looking for, and then we’ll talk about what you found.

ADRIAN SAVILLE: Sure. The motivation is that, from an investment perspective, the single most important determinant of company value, or investment value, is that you have some type of immunity or protection insulation against permanent destruction of capital. So we want to know that the businesses that we’re invested in are sufficiently equipped to navigate and negotiate tough economic landscapes, because as much as we can devote lots of time and energy to forecasting tomorrow, as economists, we’re often surprised by the reality that meets us.
   And Mike Tyson puts it beautifully when he says everyone has got a strategy until they’re punched in the face. So we want to satisfy ourselves as a point of departure that businesses have this ability to navigate and negotiate.
   But second, the determinant then of the net worth of these businesses is their earnings engine, and no better earnings engine than one that never turns off. So what we were in search of is businesses that first can withstand a turbid, difficult macroeconomic environment – and we’ve had our fair share of those over the last 15 years, which is why the study spans late 1990s till almost the present.
   And second that not only are they able to withstand that environment but does the earnings engine stay in good shape over these changing periods.

SIKI MGABADELI: All right. Let’s look at the similarities, then, in those businesses that you found able to do that. What was it that they were all doing right?

ADRIAN SAVILLE: Well I think just before we go to the similarities, it’s worth noting that, far from the expectation that this would be the usual set of large businesses and conventional names, the usual suspects, first the companies that pop out of this research are very unusual in their name. And second, it is a tiny, tiny minority of businesses that are able to do this – meaning we have to set ourselves up to be surprised by who it is that makes it into the line-up and, second, to know that this is a small set of businesses.
   When we identify those companies they have two sets of common attributes. The first is that they have agility – that they’re able to somehow step out of or away from economic circumstances or industrial disruption, and we capture those aspects or attributes by the term “agility”.
   The second is that they are able to withstand tough times, which allows them to misstep or to step perhaps slower or differently or with greater caution than many others who will leap out of the frying pan into the fire, as the saying goes. And we capture those second attributes by the term “absorption”. But we need to be just mindful of, I suppose, two qualifications.
   And the first is that agility isn’t just moving fast. Agility is rather the ability to choose the speed with which you move. And the second, in terms of absorption, is – I think the immediate reaction is to interpret this as negative, that absorption is your ability to withstand punches, to take punishment.
   But in the same breath absorption also references the ability of businesses to have sufficient immunity, ammunition, armour to take on growth because, while our suspicion is that one of the surest things to kill businesses is the lack of growth, in fact the evidence suggests that one of the surest things to kill businesses is growth that they can’t cope with.
   And so the absorption is not just taking punches but also the ability to swallow down new opportunities to grow with the economy, to expand with new market share…

SIKI MGABADELI: All right, we’ll leave it there. Thanks to Adrian Saville.