investment grade companies - what are they?, page-8

gurubob,

On CSL:
I have thought about this business model a lot. At first glance, some years ago, I held the view that CSL was a commodity business (as defined by the fact that CSL management doesn't get to set its own price list; rather, blood plasma pricing is set by supply and demand dynamics).

Yet it's financial performance and growth track record have me in recent years forming the view that the consolidated structure of the blood collection and refining industry, both in the US and in Australia, means that CSL's financial outcomes have been more akin to a dominant industry participant (which it is).

So I have to eat a bit of humble pie on CSL. My assessemnt of it was wrong. Despite it essentially being a price-taker for its products, it's financial performance and growth in cash-generation certainly have all the hallmarks of an investment grade business.

(Of course, even if it was considered to be truly investment grade, at 14X EV/EBITDA, CSL's valuation is such that I wouldn't countenance buying it anyway)

As for your question on why I don't just buy AFIC to get "overall exposure" to my list of investment grade companies, I think there has been somewhat of a misunderstanding:

Firstly, AFIC buys and owns companies that I don't care to own because I don't consider them to be capable of creating shareholder wealth throughout business and economic cycles (i.e., I dont' consider them to be investment grade, for example, NAB, OSH, STO, AMC, BXB, IPL, BKN)

Secondly, I fear you have misread "investment grade" for "buy these stocks at any old time", when the two are quite different concepts. What actually should happen is for the investment grade stocks to be bought ONLY when they are undervalued (overpaying for a good-quality company is still overpaying, and is highly unlikely to end up being an optimal wealth creating exercise). So AFIC certainly do own several investment grade businesses, but many of its holdings I consider to be overvalued. And my investment process simply precludes the acquiring of non-investment grade companies under any circumstances.

Given the weightings of its investments it should be clear to see that investing in AFIC (or any other LIC, for that matter) is not much different to investing in the overall market. And that's exactly what I don't see any need to do.

I see the overall stock market comprising four broad sub-sets:
1. Overvalued Poor Quality Businesses
2. Undervalued Poor Quality Businesses
3. Overvalued Good Quality Businesses
4. Undervalued Good Quality Businesses

In simple terms, because of its benchmark awareness, an investment in AFIC represents both 3 and 4 to a large extent.

On the other hand, I am only interested in Category 4.

Hope this provides some clarity.

Regards

Cam