Financial columnist Peter Sharkey reveals what it means to have an “economic moat”...

Prior to putting their home on the market, why do some people fail to make the beds before inviting an estate agent around to photograph their property?

Perhaps it’s the Tracey Emin influence, but this unnecessary display of untidiness certainly puts people off. Many would-be buyers conclude that if a vendor can’t be bothered to straighten the duvet, what else has been neglected?

Estate agents will tell you (correctly) that professionally-taken photographs of a clean, tidy property helps generate buyer interest, but price and location are the two most important factors that eventually persuade buyers to part with the asking price, or to at least make an offer.

Marketing the property to a large audience is a close third, which is where Rightmove comes in.

It feels as though it’s been around forever, but the company was only established in 2000. By 2015, it had captured an 80pc share of the online property advertising market, leaving competitors such as Zoopla, Prime Location and On The Market in its impressive wake.

Why is Rightmove so far ahead of its competitors? How come it enjoys such a dominant position?

‘Timing’ accounts for part of the answer. The company capitalised upon its ‘first mover advantage’ to create what Warren Buffett, the world’s most accomplished equity investor, famously calls an “economic moat”.

Next time you visit a castle, take a look at the surrounding moat (not usually applicable if said castle is perched high upon a hill) and note the extent to which this unbridgeable barrier deters enemies. Now imagine you’re part of a medieval army attempting to storm the castle; if the moat is filled with water and the castle’s occupants are well supplied, the effectiveness of your siege will be seriously compromised and will probably fail.

Warren Buffett recognised that investing in companies boasting an ‘economic moat’ made enormous sense as it gave them a unique economic advantage. Moreover, if this advantage could be sustained, it would translate into long-term profits and investment returns.

In other words, if a company can create barriers to competition (ie, a moat), it can prevent new entrants from eroding its market position. Crucially, it will also be able to sustain a higher level of profitability over a longer period.

The successful economic moat comprises three important characteristics: patented or difficult-to-copy intellectual property; very strong distribution channels through which it sells its products and third, recurring business. Anthony Cross, who manages the Liontrust Special Situations fund, believes recurring business should account for “at least 70pc of annual turnover”.

There are a number of well-known companies that have successfully operated economic moats for decades: the Disney Corporation and McDonalds, for instance, both maintaining their position at the top of the tree despite fierce competition. Two others, Visa and Mastercard, appear unlikely of being dislodged from their respective perch anytime soon: between them, the pair account for a staggering 80pc of worldwide credit and debit card transactions. Rightmove might be a relative newcomer, but it too is now recognised as having an almost impenetrable economic moat. It boasts intellectual property in the form of the technology that powers its web and app platforms. The company’s website and app capture around 75pc of people searching property portals, which Mr Cross refers to as a “strong, intangible distribution asset” and third, it collects a monthly subscription from estate agents (it has signed up more than 20,000) wishing to list their properties on its website, giving it substantial recurring business.

As we career towards the frenetic ‘ISA season’, when savers are urged to take advantage of their annual tax-free allowance (see last week’s ‘Use It or Lose It’ feature), it’s worth noting that in addition to Rightmove, Mr Cross’s fund invests in a range of UK companies which it believes possess effective economic moats. Furthermore, savers wishing to take advantage of their annual ISA allowance before April 5 can invest in the fund, as well as several others, in one of the ready-made portfolios managed by TAM asset management

Companies may possess additional intangible strengths, such as franchises and licenses, effective procedures or strong brands capable of creating barriers to competition and protecting profit margins. Rightmove’s brand couldn’t be much stronger, but don’t you wish it would ask agents to ensure that clients made their beds before approving photographs for display on its website?

TAM Asset Management Ltd offer investors the opportunity to invest in a variety of mainstream and ethical ISA portfolios before the end of the 2018-19 tax year. Several portfolios, including TAM’s ‘Balanced’ and ‘Growth’ funds, include investments in the Liontrust Special Situations fund. For further details, please visit the MoneyMapp website.

THE WEEK IN NUMBERS

•42,000

As UK employment recently hit record levels (there are 32.7 million people now in work), the number of EU workers also climbed by 42,000 during the final three months of 2018. The number of people employed in the UK rose by more than 440,000 last year.

•1

There is only one variety of fruit that is native to Wales – the Denbigh Plum. This week, it was given ‘protected designation of origin’ status, the same as that enjoyed by French champagne and Italian prosciutto ham.

•190 ft

Four hundred years since its destruction, English Heritage plans to build a 190-foot high bridge to Tintagel Castle in Cornwall. According to legend, the wizard Merlin helped Uther Pendragon sneak over the bridge so he could ravish the Duke of Cornwall’s wife Igraine and sire King Arthur.

For more financial advice, check out Peter Sharkey’s regular column, The Week in Numbers.