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Taking a look at some economic moats - Part 2

Rosemary Banyard
Rosemary Banyard

Fund Manager

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Patents, regulatory licenses, accreditations, and intellectual property rights

Warren Buffett famously introduced the investment world to the concept of an economic moat and has referred to it many times at shareholder meetings, talks to students, and in his annual shareholder letters. For example, the 2007 annual shareholder letter says that “a truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier…is essential for sustained success”1.

In this second part in a series on the subject, Rosemary Banyard, manager of the VT Downing Unique Opportunities Fund, discusses the economic moats that she looks for in companies, including patents, regulatory licenses, accreditations, and intellectual property rights.


Legal protection keeps competition out

This category encompasses a wide range of intangible assets that provide some form of legal protection against competition. Legal safeguards, such as patents, can create mini monopolies.  

The usual term for a patent in the US and Europe is 20 years. This represents a substantial amount of time during which the patent holder has the sole authority to make, use, and sell the patented invention while maintaining barriers to entry. Companies can leverage their patented technologies to generate revenue through licensing agreements or by directly manufacturing and selling products based on those innovations. This, in turn, can create a steady stream of income, contributing to the company's financial strength and competitive position.

While legal protections are highly advantageous, it's essential to note that they are typically limited in terms of time or geography, or both. Therefore, staying updated on the expiry dates of significant legal permissions and ensuring a diversified range of permissions and expiries becomes imperative. This helps prevent cliff-edge scenarios that could lead to an abrupt drop in revenues, posing a significant threat to any investment case.

To avoid the uncomfortable consequences of this, companies relying on patent protection should take a proactive approach. This involves a continuous commitment to investment in research and development, as well as the ongoing pursuit of new patent applications. As investors, we need to track these trends over time.

Moats other than patent protection

Clearly, it is better if companies have other moats besides patents to withstand competition. In the VT Downing Unique Opportunities Fund (DUO), we seek companies that don’t rely purely on patent protection for their competitive advantage but have additional barriers that make them difficult to displace. A prime illustration of this strategy in practice is one of our holdings, Tristel, a British manufacturer of chlorine dioxide for use in the rapid and effective sterilisation of outpatient equipment. While the company reported 142 patents held in 32 countries in its latest accounts, Tristel has other moats besides patent protection such as scientific validation of its chemistry via peer-reviewed and published papers. It also benefits from accreditation barriers in the form of compatibility certifications. Issued by 56 medical device manufacturers on 1,449 individual models, these certifications pose a risk to hospitals if Tristel products are not used on this equipment, potentially invalidating warranties. Finally, Tristel has regulatory approvals for its disinfectants, most recently its key de Novo approval by the US Food & Drug Administration for sterilising ultrasound probes, earlier approvals by the US Environmental Protection Agency for surface disinfectants, and an approval for sterilising ophthalmic instruments in Canada.

Profiting from increasing regulatory requirements

Legal protections often exist within regulatory environments. While ever increasing regulation can sometimes be a double-edged sword - introducing implementation, monitoring, and rising costs to the business - skillful navigation can reveal intriguing opportunities for leveraging the expanding regulatory landscape.

One way to profit from increasing regulatory requirements is by investing in companies that directly benefit from this trend, such as those providing testing and accreditation services. An example in our portfolio is Intertek, a British multinational business offering services in assurance, testing, inspection, and compliance to various industries.

As global businesses seek to diversify their supply chains away from over-reliance on China, dealing with many new suppliers, locations, and regulatory environments, this provides profitable growth drivers for Intertek. Its corporate clients need to audit their whole supply chain to avoid pitfalls which may result in fines, and equally importantly, reputational damage.

Exploiting intellectual property

Another route to earn durable profits within the domain of legal protection is to exploit valuable intellectual property (IP). An impressive example here is Games Workshop, the maker of fantasy tabletop war games, which licenses out its IP to exploit the digital as well as physical realm. The company has for some years successfully earned royalty income as licensor of its IP to manufacturers of computer games. Currently, it is in advanced negotiations to license its Warhammer 40,000 series to Amazon TV. As a benchmark, as at the end of November 2023, Games Workshop had a total of 576,000 active users of its My Warhammer single login and 169,000 paying subscribers to its Warhammer+ subscription service. Although royalty income from Amazon may prove significant in its own right, the even greater prize in our view is to persuade a tiny proportion of Amazon Prime’s 200+ million subscribers to become physical hobbyists.    

A licensee of intellectual property can also enjoy sustained profitability if its selection and marketing skills are well-honed. Successful publishing houses exemplify this concept. Book publishers typically make money from acquired publishing rights, generally valid over the full term of copyright, which is the life of the author plus 70 years, interestingly a rather longer duration than patent lives.  

Successful publishers earn revenues by identifying and obtaining rights to successful authors and selling their output over and over again and distinguish themselves through their ability to attract new authors. One of our holdings, Bloomsbury – a British publishing house - accomplishes this through its editorial and ownership independence offered to authors, a contrast to the approach of large media conglomerates. Bloomsbury is most famous for owning the rights to the Harry Potter book series (albeit sadly not for the US market). It is encouraging that 25 years after first publication, all seven of the Harry Potter books are listed by Amazon in its top 10 most-read books of 2023, with the series now lapping the next generation of readers. Bloomsbury often does not need to invest greatly in its backlist, for example it owns the rights to the works of Norwegian poet and dramatist Jon Fosse who has recently won the Nobel Prize for Literature, ensuring renewed demand for his works at no extra cost to Bloomsbury. It is worth noting here that book publishing does not have the same ongoing investment requirement as computer games, the latter having to be redesigned extensively for each new generation of games consoles. This insight has led us to disinvest from computer games publisher Team 17 during 2023 in favour of Bloomsbury Publishing.

Moats can solidify long-term success

Our focus with DUO is on businesses capable of achieving superior returns on equity capital through the cultivation of clear and sustainable competitive moats.  When a company adeptly leverages an intangible moat such as intellectual property rights, patents, regulatory permissions, and accreditations it becomes a potent source of long-term success and a promising investment. We hope to have effectively showcased some of these examples in this note, shedding extra light on how we think about the businesses we invest in.

Rosemary Banyard, Manager of the VT Downing Unique Opportunities Fund

Part 1 in the series can be found here: Taking a look at some economic moats – 1. High switching costs (

Risk warning

This content is intended for retail investors and their advisers and has been approved and issued as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please note that past performance is not a reliable indicator of future results. Capital is at risk.  

This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. This document contains information and analysis that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.


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