Pieter Slegers — How We're Going Forward

KKR invests other people's money — mostly pension funds and insurers — in companies, infrastructure and private loans, and charges an annual fee plus a share of the profits.

The reason it makes the shortlist here is not a valuation argument but a temperament one. Because most of what KKR owns is private, there is no share price flashing at it every day, so the people running it can concentrate on making the businesses better rather than on what the market thinks this quarter. The write-up says so directly: "that's exactly how we think too."

Underneath that, the fee income is unusually steady because the money it manages is locked in for years or, in the case of the insurance business it bought, permanently. Steady fee income regardless of the market cycle is exactly the "smooth compounding" this issue says it now wants.

3i Group is a listed investment company whose value comes overwhelmingly from one holding: Action, the European discount retailer.

The word used for Action here is the important one — it "opens hundreds of stores per year with remarkable consistency." This issue introduces a new rule that steady growth is worth more than the same growth delivered in lurches, and Action is offered as the example of it.

Like KKR, its assets are not quoted every day, which the author treats as helpful: it means management watches store openings, margins and long-term value creation instead of the share price. The valuation case was made a week earlier — the shares trade slightly below the stated value of what the company owns.

FICO owns the credit score American lenders use. Almost every credit decision in the country passes through it, and it collects a fee each time.

What earns it a place on this shortlist is the phrase "very linear profits". The new rule in this issue is that predictable growth beats erratic growth, and FICO's revenue is recurring, needs almost no capital to produce, and rises year after year because the company can raise prices without losing customers.

Timing is worth noting: within days of this list being published, a US housing regulator approved a competing credit score for mortgages and FICO's shares fell more than 55% from their peak. The business case survived — the argument in May is that lenders will pull both scores rather than switch — but the "very hard to disrupt" claim was tested almost immediately.

Fairfax is a Canadian insurance group run on the Berkshire Hathaway model: collect premiums now, pay claims later, and invest the money in between. Prem Watsa has been doing it since 1985.

Two things are praised. The float mechanism, which gives the company a large pool of investable money it does not have to borrow. And the culture — "they focus on business results over stock prices", which is the same trait admired in KKR and 3i.

There is an honest wrinkle worth spotting. This is the issue that introduces smooth, predictable growth as the new standard, and the Fairfax paragraph concedes in its own words that "earnings can be lumpy quarter to quarter." The defence offered is the long-run record rather than the shape of it. Fairfax is eventually bought in August, three and a half months later.

MSCI builds the indexes that investment funds measure themselves against, and takes a fee from every fund that tracks one. It also sells the data and analytics those funds run on.

Once a fund adopts an MSCI benchmark it effectively cannot leave — clients and analysts expect that yardstick and changing it looks like moving the goalposts. So the revenue is recurring, the business needs very little capital, and the fees keep arriving whatever the market does that week.

That last point is exactly why it appears on this list: the issue's new priority is businesses whose earnings compound smoothly and predictably, and an index licensor is close to the purest example available.

Judges Scientific owns a collection of small firms that make specialist scientific instruments for laboratories. Its problem is its customers: American research budgets are being cut, Chinese rivals are getting cheaper and better, and an unusually large share of its sales go to universities and publicly funded labs — exactly the buyers who have stopped ordering.

The decisive moment comes from a test borrowed from Warren Buffett: would you be happy to own this if the stock market closed for ten years and you could not sell? Applied to all eighteen holdings, fifteen got a "yes". Three got "not sure" — and of those three, this is the one named for sale. "The most likely sell candidate: Judges Scientific."

Worth noting how slowly the verdict travelled. It was still rated Hold a week later and still in the portfolio in August. A "most likely sell candidate" is a ranking, not a trade.

Novo Nordisk gets a harsher treatment here than in the portfolio review nine days earlier. It appears twice, and both are unflattering.

First, in a list of past mistakes. The author observes a pattern in his own record: "every single time I bought a company not because I thought it was the highest quality, but because it was cheap, it ended up being a mistake" — and names Text SA, OTC Markets and Novo Nordisk as the examples. That is a statement about why it was bought, not about what it is worth today.

Second, in the ten-year test. Asked whether he would be content to own it if the market shut for a decade, the answer is "not sure" — one of only three holdings out of eighteen to get anything other than a yes.

It is not being sold, though: "I don't think we'll sell Novo Nordisk or Evolution AB in the near future." A week later the shares are rated a Strong Buy on the valuation, which is a fair illustration of how differently the two questions — is it cheap, and do I want to own it — can be answered about the same company.

Evolution runs live online casino games for gambling websites. On the ten-year test — would you happily own this if you could not sell for a decade — it is one of only three holdings that gets "not sure" rather than "yes".

The doubt here is different from the others. With Judges Scientific the worry is that customers have stopped buying; with Novo Nordisk it is competition. With Evolution the business still generates a great deal of cash and the shares are strikingly cheap. The worry is about the people running it — an unexplained dividend suspension, a large shareholder building a stake, and management that does not talk to minority investors.

The conclusion is to sit still: "I don't think we'll sell Novo Nordisk or Evolution AB in the near future."