There seems to be a shortage of just about everything: semiconductors, truck drivers, used cars, you name it. The global supply-chain disruptions caused by Covid related issues appear to be lasting longer than initially expected. A concern is that these shortages could result in potentially sustained higher prices leading to a period of higher inflation. We have discussed the prospect of higher inflation in previous letters, and wish to again reaffirm our view that our portfolios are well positioned if we get a period of higher prices. The reason for our positive outlook is a by-product of our disciplined investment process.
One of the features of our methodology is to select companies for investment that have sustainable competitive advantages. One such advantage is pricing power. Quality companies can raise prices to cover inflation affecting their costs. We know that increases in the price of basic commodities may lead to inflation in the price of finished goods. Well-managed firms that face a sudden increase in costs of input goods are able to pass the price increase along to consumers. From our perspective, these are the types of companies that are able to preserve or even increase margins in the face of higher input prices and earn high returns on capital for years to come in changing conditions. Our methodology is focused on selecting leading companies with strong market positions at reasonable valuations that should be well-positioned in most operating environments.
The process is no different in our non-U.S. portfolio. The regional composition of our portfolio is dictated by where we find the most abundant quality businesses, attractively valued, as well as good corporate governance. We do have a bias towards developed markets as a result of the superior corporate governance attributes of companies in those markets. Naturally, that has led us to gravitate to certain countries like Japan, the U.K., Canada and Germany. However, in our investible universe, real geographic exposure can be quite broad. We have observed that our companies may derive ~40% of their revenues from their home markets while the rest comes from exports. This means that although Western European companies might comprise over half of the non-U.S. portfolio, Europe accounts for only a portion of the portfolio’s revenue exposure as companies diversify sales across the globe, including into emerging markets. This geographic diversity and broad revenue exposure are two additional features of our disciplined investment process.
The fundamental emphasis of our methodology is to select high-quality companies. These businesses most often can manage higher prices, diversify revenues, generate profits, efficiently allocate capital, and grow shareholder value over time. Our focus is on finding companies with durable returns at attractive valuations. From our perspective, a quality company is one that consistently creates shareholder value over the long-term.
We hope that you and your loved ones remain safe and healthy. We encourage you to reach out to us with any questions or requests. Thank you for your trust in Cardinal Capital.