Quality in times of uncertainty

In the midst of the uncertainty around the COVID-19 outbreak, it is important to focus on the principles of investing in quality and value for the long-term, and the business models and the results of the companies we invest in.  Quality is a gating condition for our investments.  Companies can be as cheap as they want but if they do not have quality, we will not invest.  Our ‘checklist’ for quality in companies has four criteria. The company must have; or be

  • Based in a good and growing industry, with high barriers to entry, a consolidated structure, a long-term growth profile or positive secular trends;
  • A strong and sustainable position in that industry, with enduring competitive advantage and a long runway of growth;
  • A management team with a record of value creation; and
  • A balance sheet strong enough to weather any kind of adversity

In looking for companies that fulfil our criteria and can provide value by generating returns of 8-10% p.a. or more, we care mostly about the business itself and the strategy its board and management have for it over the long-term.  We do look at shorter-term data as well, of course, like quarterly reports or statements.  They can provide important information and set expectations for the period.

In the following commentary we provide a number of examples of our analysis of earnings for companies that are in our World Stars Global Equities strategy that fulfil those criteria.  They provide an insight into the strength of their businesses, the performance they had before the outbreak and their resilience going forward.

2019 full year earnings reporting has unfolded in the midst of the uncertainty. Outlooks for 2020 were necessarily cautious given the possibility of significant repercussions from the outbreak’s impact on China and the global economy.

While we are vigilant about those impacts, as long-term investors we are most concerned about the performance and prospects of underlying businesses as they progress on their long-term growth path. That is why we have been encouraged to see the strong results and positive views coming from a number of our holdings in recent weeks.

Although the uncertainty in markets from the COVID-19 outbreak, upcoming US election and increasing geopolitical tensions, our companies’ prospects for growth and value creation remain bright and we believe that their shares offer great value for long-term investors.  

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