Why quality companies can grow their own way

What is special about quality companies? They can grow their own way, irrespective of the macro environment. Clyde Rossouw explains more.

Sep 11, 2020

10 minutes

  • We believe Quality companies can deliver growth irrespective of the macro picture
  • Resilient cash flows mean dividend payments tend to be more secure
  • R&D investments can consolidate an already strong competitive position
  • A company’s ROIC provides tangible evidence of how effective its strategy is
  • The quality universe has evolved over time, but our approach has not
  • Our range has typically delivered durable, defensive and differentiated alpha

In an equity market that remains uncertain against the backdrop of a deeply wounded economy, we believe investors should consider an allocation to quality companies, which we define as possessing enduring competitive advantages that enable them to deliver long-term structural growth. Typically, such companies are resilient during times of economic stress because their revenues are repeatable. This enables them to generate cashflows no matter what the macro picture, helping them outperform the wider market and emerge from challenges even stronger. Dividend payments also tend to be more protected through a downturn.

Quality companies ‘future-proof’ their businesses by continually investing in R&D, which not only drives product innovation, but strengthens barriers to entry. Another characteristic is their rock-solid balance sheets, which typically have lower debt levels than the wider market and require low capital expenditures – maximising operational flexibility. A company’s return on invested capital (ROIC) is a crucial metric, as it demonstrates how effectively management has historically deployed cash into the business. We seek to invest in companies that have high ROICs, as while high returns may attract competition, our research shows that mean reversion is less prevalent amongst quality companies.

Over time, the universe of quality companies has evolved, and – driven by our geographically diverse, globally integrated team – we have identified trends and evolved our sector exposures, while staying true to our quality approach. We have also expanded geographically since 2007, building a core UK Alpha strategy and launching several dedicated international and regional strategies in recent years. Our Quality strategies – both growth and income – have a consistent track record of delivering durable, defensive and differentiated alpha. Crucially, our range has exhibited good defensive characteristics in down markets and meaningfully participated in rising markets.

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Past performance is not a reliable indicator of future results.

Specific 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.

Authored by

Clyde Rossouw

Co-Head of Quality

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