Nigel Ridge, manager of the Deutsche UK Blue Chip fund believes quality of management will remain th...
Nigel Ridge, manager of the Deutsche UK Blue Chip fund believes quality of management will remain the most important factor in determining the future success of companies.
Businesses are changing faster than ever before driven by the developments in new technology. Technology is also lowering the barriers to entry in many markets, therefore only companies that can preserve pricing power are likely to prosper, he said.
Companies will fail if the management is unwilling to embrace change, according to Ridge.
He said as many of the business models are not yet proven, it is important to identify industries with good long term growth prospects when looking to pick tomorrow's blue chips.
He said: "The losers will be from industries where existing returns appear unsustainable. In the banking industry, for example, mortgage returns have been high. However, barriers to entry are now coming down and new entrants, such as Standard Life and Egg, are moving into the mortgage market. This has led to increased competition and falling returns. As a result, there is now a lot of consolidation in that sector.
According to Ridge, successful companies will provide proprietary 'must have' products, high quality customer service, strong branding and barriers to entry.
Ridge said: "High quality customer service is vital because if a company lacks it the customer will go elsewhere next time. For example, last year a US dot.com company sold products that many people bought for children's Christmas presents. The supplier, however, failed to deliver in time for Christmas Day. Next year, those children's parents will go elsewhere for their presents."
Strong brands are also vital to a company's success, according to Ridge.
He said companies should take cost savings from the manufacturing process and put that money into advertising in order to succeed.
He said: "In the case of 3i, its barriers to entry are created by the substantial network of offices in the UK and Europe and to an increasing extent in the US and South East Asia.
"3i's growth is created by the appetite for financial capital from high growth private companies.
"With financial returns also high, 3i appears to have a sustainable business model. Its share price has outperformed the UK equity market by more than 150% over the past three years."
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