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Thinking Aloud is a podcast series where Brown Advisory’s investment professionals unpack an idea that has recently shaped their perspective. Each episode features an informal conversation with a Brown Advisory expert about their insight, gathered from a book or article, a conversation, speaker, conference, podcast, compelling data point, or even a personal event. At its heart, the podcast invites you to explore how broad insights can challenge assumptions, deepen understanding, and inspire more intentional decision‑making. We hope each episode encourages you to stay curious, reflect on what influences your own thinking, and remain open to learning from the world around you.
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The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is for informational purposes only.
The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients.
Sustainable investment considerations are one of multiple informational inputs into the investment process, alongside data on traditional financial factors, and so are not the sole driver of decision making. Sustainable investment analysis may not be performed for every holding in the fund. Sustainable investment considerations that are material will vary by investment style, sector/industry, market trends and client objectives. The Fund seeks to identify companies that it believes may be desirable based on our analysis of sustainable investment related risks and opportunities, but investors may differ in their views. As a result, the Fund may invest in companies that do not reflect the beliefs and values of any particular investor. The Fund may also invest in companies that would otherwise be excluded from other funds that focus on sustainable investment risks. Security selection will be impacted by the combined focus on sustainable investment research assessments and fundamental research assessments including the return forecasts. The Fund incorporates data from third parties in its research process but does not make investment decisions based on third-party data alone.
Cary (00:03):
Hello, I'm Cary Buxton, a partner at Brown Advisory, and I'd like to welcome you to Thinking Aloud, a Brown Advisory podcast about the ideas that change how investors think and why that matters. The quality of investment outcomes is driven by the decisions behind them. This podcast looks upstream at the ideas and experiences that shape how those decisions are made. We hope these conversations spark reflection, encourage new ways of thinking, and remind us that there's always more to learn.
Tim (00:38):
Welcome to the very first episode of Thinking Aloud. My name is Tim Hathaway. I'm the head of strategic solutions at Brown Advisory. Today, I'm joined by Mick Dillon, co-manager of our Global Leaders Equity Strategy, and someone I've had the pleasure of working with for years. Mick, it's great to have you here.
Mick (01:06):
Yeah, great to be here, Tim. Thank you.
Tim (01:07):
Yeah, so Mick, you and I caught up on some reading you've done that has had an impact on how you think about your investment philosophy. So I think it would be helpful to share your investment philosophy, but then also how it ties into the book that you recently read.
Mick (01:22):
Thanks, Tim. One of the things that we do as part of our mindset is we're always trying to think about how we can get better. And so we have an annual offsite, and at the annual offsite last year, one of the big topics that we discussed was how we could bring more structure to a key part of our investment process, which was, we call it great customer outcomes. It's how do these companies we invest in serve the customers and make the customer's lives better? And so how does that then bring a moat or a competitive advantage around the businesses? A simple example of that is if you do a really good job for your customer and you create a heap of value, then by default, that should create a switching cost. There should be a moat getting built around a switching cost because the customer simply doesn't want to leave.
(02:07):
Roddy Simmer Williams, who works on our team here a couple of months ago, he'd read a book. It was called Investing in Hidden Monopolies, and he liked it so much. He actually went out and bought me and Bertie a copy. Bert is a co-PM on the team and handed it to us. And when I first picked it up, I was investing in hidden monopolies. Okay, sounds interesting. And then I read the subtitle, which was Why Customer Loyalty Creates Superior Moats and How You Can Profit. And that was when I was like, right, okay, actually there's a tonne of potential here. Because back to what I was saying, the number one question that we always think about is what does this company do for its customer or why is it going to be creating value over the next five years? But more importantly, why's the customer come back?
(02:51):
Why are they happy? What is it about this customer outcome that means that these customers are going to be with you for a long journey? So that was the background to the book.
Tim (03:00):
So Mek, take this philosophy as well as the readings, the learnings from this book into practise. Share an example of a company that really reflects your philosophy, but then also you think connects with hidden monopolies.
Mick (03:15):
Yeah, there's quite a few, actually. One of the things about it is it's not talking about competitive advantages in a historic way. It's talking about what it calls customer advantages. And so that is looking at, back to this, how do you create value for the customer? It's thinking about companies that actually have a dominant market position, but it's through customer loyalty. It's not because they're locked in and they can't leave. It's because the customers, like I said before, they want to do business with them. So one example is a company that we are invested in called Experian. And Experian is a company that they are data a credit bureau. And so they help their customers who are lenders understand whether or not the customers will be able to pay back. So say I go and take out a loan from a bank, what the bank wants to owe is two things.
(04:01):
First of all, have I got the ability to pay them back? Do I own enough money to pay back the loan? But secondly, what's my willingness to pay them back? Because I might have the money, but I might choose to go and pay something else and not pay the bank back. And so this willingness and ability to pay back is really, really critical because if you think about your standard bank, most banks, they actually operate on very thin margins. Their interest rate margin spreads about 2%. The percentage of losses that go bad is about 1% of their whole loan book. So in other words, their net spread is about 1%. Their return on assets is 1%. And if you can help them by looking at data, understand more and more, not just can they pay you back, but will they pay you back? And you can make an enormous difference to the customer, which is actually the bank and the lending institution because that credit, of course, is going to drive GDP.
Tim (04:54):
So Mick, before we move on from the book, I'm just curious, how did the book enhance your thinking around your investment philosophy and how you're managing global leaders?
Mick (05:04):
Yeah, thanks, Tim. It's really interesting because I've been thinking about customer outcomes for 25 years. I used to be a strategy consultant. All we talked about was customers, and we always have talked about competitive advantages and modes and barriers to entry, but what the book did was it actually inverted the framework a little bit from what I'd call traditional competitive advantages, which are about your rivals. It's like there's a response from how my competitors react to what I'm doing, and it flipped it to what it called customer advantages. And one of the problems with competitive advantages is frankly, that they weaken over time. So it helped with the thinking there. But another part where the book where I'd say it really enhanced our thinking is around thinking about there are different barriers around that customer relationship depending on what stage you are in the customer journey.
(05:53):
And I'll give you a couple of examples. When you're already a customer of a company, so you already do business with them, and as an example, there's a high cost of failure and you're a small part of their business, small part of their cost base, there's very little drive to change. You're unlikely to change your suppliers. But let's say actually you're not happy. So those things are true, but you're not happy. Well, then you might want to start looking elsewhere. And the problem is if you start looking elsewhere, but you'll say a highly customised part of their workflow, or if you move, there's risk of a monetary loss because something could go wrong in their business and their cost could explode. Even then, that doesn't mean you'll leave even though you're not happy because there's risks that if you were to do so, it wouldn't play out so well.
(06:37):
Let's say you've got over that part of the customer journey and you've decided, I'm definitely leaving, you've still then got barriers to going over to the alternate supplier because now you've got explicit switching costs, you've got to go and evaluate all the other suppliers, you've got to go and set up all the other suppliers that could be very expensive and time-consuming. And then one of the biggest ones is your staff have huge learning costs. They've got to go off one system, they've got to go onto a new system. And so a big part of the thinking was for us thinking about where the moat or the barrier to entry is in terms of the customer lifecycle or the customer journey and where different barriers around customer relationships sit at different parts in that lifecycle.
Tim (07:20):
So Mick, I think one of the more powerful forces we're seeing in the market today is the market trying to discern between AI winners and losers. And you're seeing that create a tremendous amount of volatility in software, business services. Experian would be viewed as a business service company. So I'm curious, why do you think that experience business model is more likely to benefit from AI versus be at risk?
Mick (07:48):
Yeah, this is a key question right now. So thank you. One starting point when thinking about AI is back to that job for the customer, what's the job to be done for that customer? And what's the fundamental constraint that you're solving? Is it a risk constraint? Is it a constraint around scarcity or some sort of coordination that you're doing for the customer? And so when we think about AI, we're thinking about that risk and that opportunity from a number of lenses. One is, is the technology a sustaining innovation, like back to that Clayton Christensen framework of sustaining innovation versus disruptive innovation. And to your question, is this going to be something that enables Experian to do a better job, which is can that customer payback or is there an ability for new people to come into the industry? A lot of what Experian does is based on proprietary data.
(08:38):
So there is bulk data and the credit reports are actually shared across multiple bureaus, but the real power is the willingness to pay back and the behavioural psychology of, is this customer more likely or not to pay me back? And that analysis is really based on proprietary data and proprietary algorithms. I think it's actually sustaining because the job to be done is not about technology. That's just a method of delivering the answer to the customer. There's another really, I believe, important part of thinking about AI, which is, is it a technology risk or is it a business model risk? Because if AI creates a business model risk where you can change the economics of an industry, then that is enormously disruptive. But actually it's not. There's no business model risk here because back to the job to be done, you're just getting paid with how you help your customer bring their loan losses down.
(09:28):
So when we think about the risk or the benefits from AI, be it does it help you or does it prevent a new opportunity for competition to come in? We actually think it helps Experian and in particular their customers enormously. So we actually think they're a beneficiary, but they're a beneficiary because the job to be done is based on proprietary data that they have.
Tim (09:47):
Yeah. And Mick, I think one thing I think is so important in this business is maintain this level of humility. And we know that the AI space is evolving rapidly and models, LLMs are getting better. And knowing that this is a dynamic situation, how do you track whether your thesis on Experian is not being disrupted at all? I guess part of the question is, are you engaging with management to understand how are they embracing AI just to make sure that they're on the right side of it versus the wrong side of it?
Mick (10:21):
Yeah, you're absolutely correct. This is moving so fast. It's not just management of Experian that we're engaging with. One of the things that we do is we have a team, we call them investigative analysts and they go out and one of the things they do for us is they go and get into the mind of the customer. So Bertie who's my co-PM, he always says, "You've got to be able to think like the customer. And the only way to do that is talk to the customer and understand why do they come back? Why do they buy this? " To your question, why can't they just go somewhere else? And so Shaheen and that team go out and talk to the customers as well. And it's really interesting when you talk to the customers. The customers actually don't want options, they just want answers and they know that the better answers come from better data.
(11:00):
And so it's actually the job of management to use AI to deliver the answers in better, more effective ways, which they're doing, of course. So when we sit down and talk to the customers, it's really interesting because at that point, what the customers want in their workflows and in their businesses is quite frankly, just help me keep my loan losses low. And that job is better done by using AI, but that's a tool for you. It does change what you're doing. It changes how you're doing it, but it doesn't change the end job.
Tim (11:31):
Okay. So Mick, shifting gears a little bit, you've had a circuitous route as far as arriving at Brown Advisory. You were working in Hong Kong and decided to work for a Baltimore-based firm that required you to work out of our London office, but you've been in this industry, had a lot of experience for many, many years, the investment management business. What's the best piece of advice you think you've received?
Mick (11:55):
Thank you, Tim. And actually, I got to say thank you to you, because if it wasn't for you, I wouldn't be at Brown Advisory. Actually, maybe the best piece of advice was you telling me to come and work at Brown. Actually, slightly more seriously, you did give me a piece of advice that I live by today, and it's not so much about investing. It's really important for everybody who's got a young family, if I'm honest. And it's a couple of years back and we were coming out of COVID and I was commenting to you how quickly my kids were growing up. And one of the best ever pieces of advice that in fact you gave me was to invest the time and space to create family memories and to make sure that along the way, because I've lived in Hong Kong and Australia and America, et cetera, as you said, but to make sure along the way that you took the time to create family memories and family traditions.
(12:43):
And it's something that ever since then I've really, really and my wife, we've really invested in that because before you know it, your kids are at university and they're off and they're gone. And if you don't create those traditions and those family moments, it's very easy for life to slip you by. So actually it's very important to focus on the investing, but it's also very important to focus on your family too.
Tim (13:02):
That's super interesting. Mick, it has been a pleasure to have you at Brown and a pleasure to have you on this podcast. And to everyone listening, thank you very much for joining our first episode of Thinking Aloud, and we very much look forward to the next one.
Cary (13:16):
Thank you for listening to Thinking Aloud. We hope this episode gave you something to reflect on and perhaps a new way of thinking. Please subscribe to hear more conversations like this.