In the summer we purchased a position in S&P Global Inc. (NYSE: SPGI). The company, founded in 1917 and headquartered in New York, has developed some of the critical tools used by the various participants of the capital market ecosystem. It primarily provides market and sector indices, independent credit ratings, and market intelligence tools.

S&P Global is best known for its market indices such as the S&P 500 and the S&P Dow Jones. For decades, these benchmark indices have enjoyed large-scale adoption among market participants, especially financial institutions. To meet the growing demand from investors, in addition to market indices, S&P Global also provides a broad variety of indices that span sectors, industries and specialized segments such as ESG. We believe that S&P Global’s comprehensive offerings, strong brand and global reach give it a strong competitive advantage in this segment of its business.

Another significant revenue source for S&P Global is its credit ratings business. Ratings are a measure of the likelihood of a borrower to meet its financial obligations. The global debt market is expected to continue growing, and most existing debt will need to be refinanced. According to the Organization for Economic Co-operation and Development (OECD), “around 40% of sovereign bonds and 37% of corporate bonds globally will mature by 2026, requiring further borrowing from the markets.” S&P Global and Moody’s are the two leading credit rating agencies in the world; according to the SEC, each company has approximately a 40% market share, followed by Fitch with 13%. Issuers of credit securities value the credit ratings provided by S&P Global and Moody’s because of their wide acceptance by investors, and vice versa — this creates a network effect. In addition, a rating from one of these “Big Three” firms is especially critical for cross-border marketed securities, as global investors desire broad comparability across global credit securities. For example, an investor wants to know that a B+ rating for a company in California is similar to a B+ rating for a company in Chile or India. Once a benchmark is accepted by market participants globally, it is difficult to displace. As a result, S&P Global has strong pricing power in its ratings business.

The global stock and credit markets each exceed $100 trillion in value. These markets continue to grow as investors, some retail investors, seek higher returns in a low-interest rate environment. The growth, volatility and complexity of the financial markets have fueled the demand for “market intelligence” tools to analyze companies, industries, and the overall market; we expect this trend to continue. To meet this need, S&P Global has developed its Capital IQ platform, which is comparable to Bloomberg and FactSet.

We believe S&P Global is a strong addition to our portfolio because it has established a wide moat around two of its business segments — ratings and indices, and has competitive offerings in its remaining segments. As the financial markets grow in their depth and breadth, we expect the demand for S&P Global’s services to continue to grow. The company has built a resilient business model as evidenced by its strong margins. Furthermore, it has a history of share buybacks, and is a dividend aristocrat, having increased its dividend for 51 consecutive years.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.