Sector specialisation - why we rather go deep than wide

Importantly, in investing, it is not the size of that circle that counts, but knowing when you are approaching the perimeter. 

Specialisation within a particular sector allows investors to build deep subject matter knowledge, create strong industry relationships, and efficiently conduct targeted due diligence by knowing who and what to ask. For example, compared to a doctor who spends an entire career learning, developing and relearning skills, in say interventional cardiology, a generalist investor doing a few expert calls and a bit of reading cannot really be expected to understand the nuance and difference between the devices used in an operating theatre, the background trial data, and the likelihood of a new technology replacing an old paradigm. In healthcare, this shift of one treatment paradigm to another builds slowly at first and then occurs fast, which is a high impact risk that can ruin an investment thesis. There is just no replacement for earned, rather than learned, knowledge. Using deep sector knowledge within our circle can be critical to avoiding these types of traps and generating long-term returns.

In high-conviction investing, it is often as much about an ability to hold one's nerve during a drawdown and stick to the process, as it is finding great investment ideas to begin with. To build conviction and avoid being bluffed out at the bottom requires intense due diligence and understanding of the external environment around a business, as well as the micro details of current and anticipated performance. An important part of the due diligence process is knowing what to ask and to whom, to cut through the always rosy prepared remarks that CEOs and investor relations teams provide. We have found that our ability to build conviction is certainly greater within our own circle. 

And for the sake of deep and complete understanding of an investment thesis, it is also critically important to stay consistently attuned to industry trends. Trying to pick up technology advancements, new competitors and novel business models each time you switch industry focus is a sure-fire way to miss key and critical details. We have found that as specialist investors, our ability to mitigate these risks is better inside our circle with consistent focus on sector-specific technology obsolescence, competitive challenges, and shifting business models.

A common observation of a specialised investment strategy is that it presents a perceived lack of diversification. However, diversification for diversifications sake has not proven to be a risk mitigation tool, rather a risk spreading tool. With each new position in a portfolio, the portfolio becomes more similar to the index, and the depth of understanding of each prior and new position decreases. After all, how well can a portfolio manager truly understand their 48th 'best idea'?! As Charlie Munger famously said: "It's far better to have a few things you understand well than to have a lot of things you don't".

Here at Cordis our circle of competence is wrapped tightly around the medical technology sector. We believe that investing in medtech requires a level of precision and depth of knowledge analogous to the delicate medical technology procedures performed by the doctors themselves. The Fund’s genesis came from a hospital operating theatre, rather than on a Wall St trading floor, allowing us to build out a world-class Medical Advisory Panel - a group of globally leading physicians and academicians who are intimately involved with the Fund's research phase of our investment process. Medtech is a dynamic industry with regulatory and legal hurdles completely different to any other, even within the healthcare sector. The complexities of regulatory approvals, the nuances of clinical trials, and the intricacies of different medical specialties require a deep understanding of the scientific and technological landscape, as well as an understanding of the financials. We feel that our investment specialization has become increasingly important in a modern and fast-moving medtech investing landscape.

To improve the odds of success in investing - and in life - understanding the perimeter of your circle of competence is of the utmost importance. By developing a deep understanding of the medtech sector and not being distracted by noise outside our circle of competence, we are able to make more informed decisions while managing risks effectively and leveraging industry networks. As Benjamin Graham once remarked: "The intelligent investor does not attempt to be a jack-of-all-trades". This wisdom holds particular weight with us here at Cordis. 

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