Chris Hohn: A Case Study

buying quality

As someone who spends a lot of time thinking about investing. Part of that time is dedicated to looking at other investors portfolios. Personality I think it would be wise for someone who is interested in investing to make a list of investors who they personality look up too and once in a while check what they are buying. This is a good way to generate ideas because it's already gone through a lot of filters to be bought.

One investor I keep my eye on is Sir Chris Hohn. Sir Chris Hohn, founder of The Children’s Investment Fund Management (TCI), stands out in the hedge fund industry for integrating philanthropy with investing. At TCI's inception in 2003, Hohn pledged a portion of management fees to a charitable foundation. He has raised billions (yes billions with a b) for charity. Currently TCI has $42.4 bn under management.

I admire a man like Sir Chris Hohn. A great investor but his philanthropy shows it's not all about the money. Many investors are involved in philanthropy, famously Warren Buffett has his own charity with Susan Thompson Buffett Foundation and has deep ties with the Bill & Melinda Gates Foundation. Another investor Mohnish Pabrai also runs a charity called Dakshana which helps gifted underprivileged youth in India. I have a term for this, I call this ‘‘compassionate capitalism’’. What I also like about Sir Chris Hohn is the concentration of his portfolio.

$42.4 bn in just 10 stocks that’s real conviction. Most of TCI’s portfolio is concentrated in monopolistic type companies. By my count, around 80% of the fund is in dominant, moat heavy monopolistic businesses. In this write up, I’m breaking down each holding by focusing on two things:

1. What makes it a great / monopolistic company / large moat

2. The estimated price Sir Chris Hohn paid using next 12 months' Price to earnings ratio (P/E NTM) as a simple valuation yardstick.

   For those unfamiliar, P/E NTM just means how much investors are paying today for each dollar of expected profit over the next year. For example, if a company earned $100 million in net income last year and earnings are expected to grow 10%, then next year’s forecasted net income would be $110 million. If the market cap is $1.32 billion, the P/E NTM would be: $1.32 billion ÷ $110 million = 12x. I’m just using P/E (NTM) as a measuring stick due to its simplicity.

   To estimate Hohn’s buy in price, I used Fintel to track when shares were purchased (based on 13F filings, which funds must submit within 45 days of each quarter-end). Then I matched that date with the historical P/E (NTM) on Koyfin. I’ve linked the data so you can follow along. There's only 2 stocks on the list I'm not going to cover because I don't think they fit under the monopolistic framework. The 2 stocks are GE Aerospace and Ferrovial Se. Apologies in advance if I miss any key details when going over these businesses i’ve done my best to keep the overview short and focused on what makes them great.

Credit Rating Basket 26.99% of Portfolio: Moody's (14.78%) & S&P Global (12.21%)

Moody’s has one of the widest moats in finance not because of patents or tech, but because of trust, brand, and how deeply it’s built into the system. There are only a few real players in the credit rating game Moody’s, S&P Global, and Fitch. But in practice, it’s mostly just Moody’s and S&P. If you’re a company issuing bonds, investors don’t just want any rating they want a Moody’s rating. It’s a name people recognize and trust, and that trust has been built since 1909. What also makes Moody’s powerful is that it benefits when the economy is growing. When companies borrow money, Moody’s gets paid to rate their bonds. So as long as the U.S. economy keeps growing, Moody’s will keep earning. Owning Moodys stock is like owning a small piece of every bond deal that happens.In short, Moody’s has a simple but powerful moat almost no real competition, a trusted brand, and steady earnings tied to economic growth. It’s a tollbooth business and the tolls keep rising.

Keep in mind, this is a financial company that was founded all the way back in 1909. That means Moody’s has been through just about every major economic event you can think of World War I, the Great Depression, World War II, stagflation in the ’70s, the dot-com bubble, 9/11, the 2008 financial crisis, and COVID.

And yet, it’s still standing. Not just surviving, thriving.

The fact that Moody’s has lasted over a century shows just how strong and durable its business model really is.

(2023 chart)

Source https://fintel.io/so/us/mco/tci-fund-management

Looking at what P/E (NTM) Chris Hohn paid for these investments in Moodys it came to an estimated average of 27.8x. The lowest multiple paid was 18x and the highest was 38.9x.

S&P Global, much like Moody’s, operates with a "toll booth" business model, earning fees each time a company issues debt. However, S&P Global’s business is more diversified. The credit rating is only a segment of the business. For instance, another part manages the S&P 500 index. In a nutshell S&P Global makes money from the S&P 500 by licensing the index to financial products like ETFs (e.g. SPY) and charging fees based on assets under management. It also earns revenue by selling benchmark data and analytics to investors, funds, and institutions that rely on the index for performance tracking and investment decisions. Another part of their business is Capital IQ. Capital IQ is part of S&P Global’s Market Intelligence segment and provides financial data, analytics, and research tools to investment professionals, banks, and corporations. It runs on a subscription-based model. It's like a more expensive version of Koyfin but a cheaper version of Bloomberg Terminal. S&P Global is a great company. This combination of essential services of credit ratings and index management makes S&P Global an indispensable part of the financial system, allowing it to generate consistent revenue.

Source https://fintel.io/so/us/spgi/tci-fund-management

Looking at what P/E (NTM) Chris Hohn paid for these investments in S&P Global it came to an estimated average of 25.8x. The lowest multiple paid was 18.6x and the highest was 31.2x.

Railway Basket 16.48% of Portfolio: Canadian Pacific Kansas (9.37%) & Canadian National Railway (7.11%)

Formed in 2023 from the merger of Canadian Pacific Railway and Kansas City Southern, CPKC is the first and only single-line railway connecting Canada, the United States, and Mexico. Headquartered in Calgary, Alberta, CPKC operates approximately 32,000 kilometers (20,000 miles) of track across North America. The company provides freight transportation services for various industries, including agriculture, automotive, energy, and intermodal shipping.

Regarding Canadian National Railway which was established in 1919. Canadian National Railway is headquartered in Montreal, Quebec. It operates a transcontinental network spanning approximately 32,000 kilometers (20,000 miles) across Canada and the United States, reaching from the Atlantic to the Pacific and down to the Gulf of Mexico. CN's services include rail, intermodal, trucking, and marine transportation, catering to industries such as automotive, forest products, grain, and chemicals.

Railways have a really strong moat one that could last for centuries because they’re built into the land and can’t be easily replaced. Laying down new tracks would cost tens of billions, so it’s nearly impossible for a new competitor to show up. Unlike tech or customer service, you can’t outsource a railway to another country. As long as the U.S., Canada, and Mexico keep trading and growing, railroads will keep moving the goods. Futhermore some things, like coal or massive amounts of grain, simply can’t be moved by truck or plane it’s too heavy, too costly, or just not allowed. So railroads hold a unique place in the economy, with very few real alternatives.

Source https://fintel.io/so/us/cni/tci-fund-management & https://fintel.io/so/mx/cpkc%20n/tci-fund-management

Looking at the P/E (NTM) ratios for Canadian National Railway (CNI), the average multiple over the observed periods came to approximately 19.9x, with the lowest being 16.6x and the highest reaching 24.1x. In comparison, Canadian Pacific Kansas City (CP) was trading at a 25.4x multiple as of 30/06/2023, notably higher than CNI’s historical average.

Microsoft (13.91%)

Microsoft is another great company with a massive moat one that’s been built and reinforced over decades. One of the clearest examples is its dominance in desktop operating systems. Windows powers the majority of PCs around the world, and that’s not just by chance. Once someone learns to use Windows, and a company builds its workflows and IT infrastructure around it, switching becomes incredibly difficult and expensive. It’s not just about preference it’s about compatibility, staff training, legacy systems, and integration with thousands of tools. But Microsoft’s grip doesn’t stop there. Its Microsoft 365 suite which includes Word, Excel, PowerPoint, and Outlook is practically a business necessity. Excel, in particular, is deeply embedded in the way finance, accounting, logistics, and even engineering are done across the globe. Professionals build complex models and systems in it that can't easily be replicated elsewhere. This creates high switching costs and network effects: everyone uses it because everyone else uses it. Microsoft reinforces its dominance by bundling services and creating an ecosystem if you're already using Outlook and Excel, it just makes sense to use Teams, OneDrive, and Azure too. It's a classic case of ecosystem lock-in, making Microsoft incredibly hard to displace.

One of Microsoft’s biggest competitive advantages comes from its ability to clone or acquire competitors. Historically, Microsoft hasn’t always created category defining products it often waits, watches, and then dominates. Take Excel, for instance. Lotus 1-2-3 was the original spreadsheet king. Microsoft came in later with Excel, made it slightly better, bundled it with Office, and crushed the competition. More recently, consider Microsoft Teams. Slack had already captured the market for workplace chat. Microsoft didn’t innovate they cloned it, baked it into the Office suite, and outscaled Slack through corporate bundling. And of course, when cloning doesn’t work or takes too long, Microsoft isn’t shy about buying. Their acquisitions of LinkedIn, GitHub, and Activision Blizzard weren’t about reinventing the wheel, they were about owning the roads everyone already drives on. Even with AI, they didn’t build ChatGPT they partnered with OpenAI and now own 49% of its for profit arm. That stake gives them exclusive rights to integrate the world’s most popular language model into their products without having to build it themselves.

Source https://fintel.io/so/us/msft/tci-fund-management

Looking at what P/E (NTM) Chris Hohn paid for these investments in Microsoft it came to an estimated average of 27.8x. The lowest multiple paid was 22.6x and the highest was 33.5x. Coincidentally Chris Hohn paid the same average multiple for Microsoft as Moodys, interesting.

Visa (12.52%)

Visa is one of my favorite companies and for good reason. Visa isn’t a bank and it doesn’t issue credit. Instead, it's a global payments network that facilitates electronic transactions between consumers, merchants, banks, and governments. Every time someone swipes or taps a Visa card, Visa takes a small cut of the transaction not from lending money, but from processing it. Think of Visa as a tollbooth on global spending. What makes Visa especially powerful is its dominant position. It’s the market leader in the U.S. handling more transactions than anyone else, including its closest competitor, Mastercard. The big question for long term investors is simple, will people be spending more money a decade from now? If the answer is yes and history suggests it will be then Visa is well positioned to keep growing. More spending means more transactions, and more transactions mean more revenue for Visa. It’s a simple, scalable, and extremely profitable business model. Unless a nuclear war kicks off and currency becomes seashells Visa has a very strong moat. Consumer spending will keep on increasing decade over decade.

(2023 chart)

Source https://fintel.io/so/us/v/tci-fund-management

So far, this is the highest P/E (NTM) price Chris Hohn has paid so far compared to the other companies we looked at. The average P/E (NTM) paid for Visa is 30.9x, the highest he pad is 38.2x and lowest was 22.2x.

Alphabet / Google (10.1%)

Alphabet is another world-class business with a dominant position. At the heart of it all is Google Search, which commands around 89.74% of the global search engine market It's not just market share it’s mindshare. The fact that “Google it” has become a universal phrase speaks volumes about its cultural and practical relevance. Another crown jewel in Alphabet’s empire is YouTube. With 2.5 billion monthly active users, it's one of the largest media platforms on the planet. Acquired in 2006 for $1.65 bn, YouTube generated $36 billion in revenue in 2024 alone. What makes YouTube so special is its irreplaceability. Unlike TikTok, which dominates short-form clips, YouTube is the undisputed home of long-form video documentaries, tutorials, essays, commentary, and more. It’s essentially the TV of the internet, and there’s no serious competitor in that space. Alphabet also dominates the mobile landscape through Android, its open source mobile operating system, which powers roughly 71.9% of global smartphones.

However, Alphabet has recently run into trouble with ongoing antitrust battles against the U.S. government. In the latest case, a federal judge ruled that Google illegally monopolized parts of the online advertising market by unfairly controlling both the tools publishers use and the ad exchange itself. This marks Google’s second major antitrust loss in under a year. While the court didn’t find all parts of its ad business illegal, it concluded that Google’s actions harmed publishers and reduced competition. As a result, the government may push for Google to break up or sell parts of its ad tech operations though the company plans to appeal the ruling.

Regarding Alphabet purchase price. Chris Holm paid on average P/E (NTM) of 22.4x. With the highest being 23.7x and the lowest being 17.8x. Interestingly enough Alphabet is currently trading at a P/E (NTM) of 17x.

Putting it All Together

Putting it all together, it becomes pretty clear what Chris Hohn looks for, high-quality businesses bought at fair prices. Sure, some might argue that paying 25.7x earnings is a bit steep. But valuation, is more art than science. What’s undeniable is that the companies in his portfolio are some of the best in the world dominant players with deep moats and high returns on invested capital. Below are a few quotes from Buffett and Munger that, in my view, capture Hohn’s investment style better than I ever could.

‘‘It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price’’ – Warren Buffett

‘‘ We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it is undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing ’’ – Charlie Munger

‘‘Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earnings six percent on capital over forty years and you hold it for those forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result’’ – Charlie Munger

‘‘We see change as the enemy of investments. So, we look for the absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs’’ – Warren Buffett.

‘‘Time is the friend of the wonderful business it's the enemy of the lousy business. If you’re in a lousy business for a long time you’re going to get a lousy result even if you buy it cheap. If you’re in a wonderful business for a long time even if you pay a little too much going in, you’re going to get a wonderful result’’ – Warren Buffett Florida University speech

‘‘ Your goal as an investor should simple be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines’- Warren Buffett annual letter to shareholders 1996’’

Thank you for reading I hope you learnt something

Happy Easter.