Global Insights

Why Quality is core

The Ninety One Quality team discuss why investors should consider quality investing as a core element of a portfolio.

17 Jun 2022

2 minutes

Clyde Rossouw
Paul Vincent

The fast view

Significant optionality for shareholders

  • Quality is no longer a thematic approach – it can be a core allocation for pensions globally. By investor type, quality works for the retail and advisor space, and for the institutional market.
  • Quality companies tend to have significant optionality, with their key attributes helping them navigate any market conditions. This includes possessing the pricing power to combat periods of inflation.
  • The Ninety One Quality proposition is to offer clients access to some areas that they may not have extensive knowledge about, and our portfolios reflect this.

How has the year fared so far?

  • Markets have had a challenging year. But some of the companies that have significantly derated remain fundamentally sound, and their investment theses are intact.
  • This presents an opportunity to buy more of our existing holdings and explore investing in stocks that have previously been too expensive.
  • The significant winners have clearly been oil & gas, but we will not invest in this space. The companies have poor free-cashflow profiles, with much of their cash eaten up by significant capital-expenditure requirements, which increase during inflationary environments.

US tech is not homogenous

  • American Franchise offers access to many niche long-term structural-growth opportunities within the US market; the portfolio is not simply a carve-out of Global Franchise.
  • Selling has been indiscriminate this year, with many tech stocks – including software companies – caught up in the rotation away from ‘big tech’. However, our holdings are mature companies with long-term growth prospects, trading at lower multiples than the broader tech space.

Asia opportunity has expanded

  • Over the past decade, we have seen an expansion of quality in Asia, especially in the healthcare and consumer spaces. The companies we own give us significant exposure to long-term secular growth trends such as data usage and digitisation, ageing populations, and healthcare, nutrition and wellness.
  • While it is difficult to be precise on when the regulatory environment will ‘normalise’, we believe we are approaching that point, and the stresses of recent months can start to be looked at through the rear-view mirror.
  • The spike in COVID cases is probably the biggest headwind facing investors in the region, given the virulence of Omicron and the insistence from authorities that strict measures would continue until the virus was eradicated.

All investments carry the risk of capital loss

Specific risks
Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios.

General risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Authored by

Clyde Rossouw
Head of Quality
Paul Vincent
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

All rights reserved. Issued by Ninety One.

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