Holdings Update: Buy Marsh McLennan
Jensen Investment Committee adds Marsh McLennan to Quality Growth Strategy (“Strategy”).
Founded over 150 years ago, Marsh McLennan (MMC) is a leading professional services firm, offering its clients advice and solutions in areas of risk, strategy, and people. MMC operates four distinct businesses in two segments: Risk & Insurance Services (RIS, 60% of sales) and Consulting (40% of sales).
Within RIS, Marsh (50% of sales) is the #1 global insurance broker, and Guy Carpenter (10% of sales) is tied as the leading global reinsurance broker. Within Consulting, Mercer (28% of sales) is the #1 health & benefits broker, #1 retirement advisor and #1 outsourced Chief Investment Officer (OCIO), while Oliver Wyman (12% of sales) is a leading strategy consultant.
Economies of scale and switching costs represent the company’s two main competitive advantages across its range of businesses. For example, in insurance brokerage, Marsh is one of only two companies with the global scale necessary to effectively serve Fortune 1000 multinational clients, with its local operations across more than 130 countries. Insurance brokers also benefit from high customer switching costs due to the combination of in-depth client knowledge and their role as independent fiduciaries in matching risk exposures with insurance coverages. In consulting, Mercer clients include over 95% of Fortune 500 companies, a testament to its strong brand and leadership position in health, wealth, and career advice and solutions.
MMC’s revenue model is a critical component of our investment thesis, primarily consisting of sales commissions for brokerage services and advisory fees for consulting services. Unlike insurers, brokers do not take underwriting risk, resulting in a much less volatile organic growth profile relative to insurance pricing cycles and minimal capital intensity. Consequently, the MMC business model has attractive characteristics, including low capital intensity, good margins at scale, and high recurring revenues due to sticky advisory relationships and annual policy renewals.
We expect MMC to continue to grow through a combination of organic growth arising from strong underlying demand for its brokerage and consulting services, together with opportunistic and accretive bolt-on acquisitions to expand its service offerings and geographic footprint.
Marsh McLennan demonstrates many of the “Quality Growth” attributes we favor including sustainable competitive advantages, high returns on equity, strong and improving margins, an excellent management team, and consistent free cash flow generation. We are pleased to add it to the Strategy.
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