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3 ways to beat the market by investing in monopoly style businesses

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A monopoly (in the economic sense, not in board game parlance) is defined as the exclusive possession or control of the supply of, or trade in, a commodity or service.

Being the owner of a monopoly asset can be a powerful income generator. Australia has several pieces of legislation in place to guard against the misuse of market power and to prevent monopolies from occurring or becoming too powerful. This helps to balance the needs of consumers against those of big business.

However, the fact is that effective monopolies exist, and luckily, investors can own a share in them as several of these are listed on the ASX.

So which three companies make the grade?

Sydney Airport Holdings Ltd (ASX: SYD) is arguably the most true representation of a monopoly asset on the ASX. It operates the sole international airport serving Australia’s largest population centre, and heart of the national economy.

It also has the means to protect its monopoly, with a law allowing Sydney Airport a “right of first refusal” over the option to build a second international airport for Sydney. Even if that project is approved, the location at Mascot will continue to be preferred by a vast majority of travellers for its proximity to the city.

If you had owned shares in this monopoly asset for the past three years, you would be over 100% up on your investment.

ASX Ltd (ASX: ASX) is the holder of another crucial economic monopoly asset. The company has exclusive rights over the clearing and settlement functions of the national stock exchange. Put simply, that means that when investors transact in stocks and other financial products and assets, the ASX is the middleman that facilitates the transaction securely, and charges participants for the service.

However, prospective investors should take note that the Federal Treasurer has recently announced that the ASX will lose its legislated monopoly for clearing services within 18 months. Despite this, the ASX is the incumbent, and 18 months is an ample amount of time to develop ancillary products and services to encourage market participants to stay with the company. In addition, competitors may not materialise at all due to the relatively small size of the Australian share market.

Holding ASX Ltd shares over the last three years would have earned investors around 15%, not including dividends.

Seek Limited (ASX: SEK) is a stellar example of a new-age technology monopoly asset. Online job boards became popular in the early 2000s, but as of 2016, is undoubtedly the dominant force in online job advertising in Australia.

By seeing off competitors, Seek can charge premium prices to employers to post job ads on its portal, and can also raise prices without much fear of losing substantial amounts of business to a competitor.

Seek is attempting to build similar economic monopolies in countries around the world, but is exposed to local competitors as well as global players like LinkedIn. It remains to be seen whether this will be successful, but Seek is in the enviable position of being able to fund its international foray with the earnings from its dominant domestic monopoly.

An investment in Seek shares three years ago would have rewarded investors with returns over 58%.

Foolish takeaway

Investing in companies with monopoly assets could be a relatively simple and stress free way to steadily grow the value of your portfolio over time. Of the stocks on this list, Sydney Airport has the best monopoly asset, while Seek has both the highest risk and highest reward potential due to its international expansion strategy.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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