Companies, when directly impacted by a change in tariffs, have a few options in the short term: 1. Pass the change in tariffs on to the end consumer with an increase in price, keeping margins stable; 2. Eat the price increase from tariffs and suffer reduced margins; 3. Some combination of the two in order to balance unit sales and profit margins.
In the longer-term, say 1-3 years, companies have the ability to adjust their supply lines to increase local content and lessen the impact of any change in tariffs. After the tariffs have been put in place and base year effects kick in, there should be less impact to GDP growth in future years.
Most companies around the globe shouldn’t be directly impacted by a change in tariffs, but could be affected by the overall slowdown in GDP growth rates. If a company were directly impacted by a tariff change, the impact would naturally be greater. However, there are some winners too. Companies based in other locales or which provide more local content could be helped in an equally positive direction with higher prices, more demand, or a combination of both.
Impacts To The Buffalo International Fund And Its Holdings
The first tenant of our investment approach is to identify companies with structural tailwinds driven by secular growth trends. We generally believe these trends will continue to push the underlying fundamentals of our companies throughout the economic cycle, and through any economic turbulence caused by changing tariff regimes. Because we invest with an eye toward secular growth, we naturally have limited exposure to commodity-type products or heavy industries that are the typical focus of most trade actions.
We are focused on owning companies with wide economic moats and strong intellectual property which, while not immune, have substantial barriers to competitive pricing dynamics and we think should benefit from a strengthening of intellectual property rights. We also don’t look favorably on companies that benefit from governmental largess, as regimes change and politically-erected barriers can easily be dismantled.
This isn’t to say that our portfolio is completely immune to a slowdown in global economic growth, or that none of our companies might be the subject of a trade dispute. It’s simply that the underlying trends driving the fundamentals of the companies we own should be less exposed to direct impact of trade disputes and should over-time be able to better weather any potential set-backs caused by escalating trade tensions.
Example From Bufix Portfolio
Sartorius is a company we’ve owned in the Fund for quite some time. Sartorius provides equipment for the manufacture of biologic pharmaceuticals. The company is exposed to a few secular growth trends which should help drive their fundamentals:
• Increasing use of new biologic agents to combat disease;