Some industries produce more economic profit than others. How much economic profit a sector or industry tends to produce is often a function of how difficult it is to enter. High entry barriers can therefore provide a sustainable competitive advantage for incumbents. Take banking. Unlike retailing or steel manufacturing, there are all sorts of obstacles to starting a bank. Not only do you need licences from one or more regulators, but you have to build up trust with depositors, as well as a network of companies to lend to. As such, banks tend to produce excess returns on capital which can often be sustained over the long term. Assuming, that is, that they stick to the simple business of lending and deposit taking.
Hugh Young is managing director at Aberdeen Asset Management Asia.