While Terry Smith has richly rewarded investors, his fund isn’t the only product in town with a quality tilt
Thursday 23 Jul 2020 Author: James Crux

With the risk of a second coronavirus wave weighing on sentiment and the worst of the economic fallout from the pandemic to follow, risk-averse portfolio builders should swerve the trash and instead put cash to work in quality stocks, or in funds with a quality tilt to them.

There are no guarantees, but we think shares or funds that are quality through and through will provide generous returns over the long term. We’ll look at some of the lesser-known quality funds in this article.

QUALITY QUEST

High quality companies have something special about them. They should be consistently profitable, growing their earnings and typically have fortress balance sheets to help them fund their growth and navigate unexpectedly tough times.

When people talk about funds that have a quality tilt, most reference the likes of Terry Smith’s Fundsmith Equity (B41YBW7) and products from the Lindsell Train stable including Finsbury Growth & Income Trust (FGT) and Lindsell Train Global Equity (B644PG0).

While each of these funds has its own merits, there are many other quality funds worth researching. For instance, the Blue Whale Growth Fund (BD6PG56) is not that well-known having only launched three years ago, yet it has become one of the best performing funds in its category.

Tech-savvy fund manager Stephen Yiu runs a highly concentrated, high conviction portfolio and aims to buy and hold high quality businesses at an attractive price. The Blue Whale portfolio includes Adobe, Amazon, Mastercard, Microsoft and PayPal. Assets under management have grown from £25 million at launch in 2017 to £431.5 million through a mixture of new inflows and share price appreciation.

DIFFERENT APPROACH

Approaching its fourth anniversary, the £165 million Latitude Horizon Fund (BDC7CZ8) is managed by Freddie Lait who believes that quality cyclical stocks are ‘one of the most attractive areas of the stock market today’. His portfolio has investments in the likes of investment bank JPMorgan and industrial gas concern Air Liquide.

Lait looks to deliver long-term capital growth through a concentrated portfolio of best-in-class operators, while also lowering equity risk and enhancing returns through a selection of short-term treasuries, gold and inflation-linked bonds.

In his June factsheet, Lait warned that investors who own quality stocks in exclusivity now face heightened risk due to the prices they are paying for the highly certain attributes such companies boast.

HAVE A BIT OF BUFFETT

Two funds run according to the principles of Warren Buffett, one of the world’s most famous investors, are the £1.31 billion CFP SDL UK Buffettology (BF0LDZ3) and its smaller sister fund, the £14.2 million CFP SDL Free Spirit (BYYQC27).

The former is run by Sanford DeLand’s Keith Ashworth-Lord while Free Spirit is managed by Andrew Vaughan, who previously worked with Ashworth-Lord on the ‘Analyst’ research publication and joined him at Sanford DeLand in 2017.

Skewed towards overlooked UK small caps, which plays to Vaughan’s research background, the all-cap Free Spirit fund’s ability to also invest in mid and large cap names differentiates it from pure small cap funds.

Just like Buffettology, the Free Spirit fund invests in quality companies with attributes including economic moats, embedded customers, what it deems to be excellent management teams, and easily manageable debt.

Companies nestling in the portfolio include in-vitro diagnostics testing firm EKF Diagnostics (EKF:AIM), fantasy miniatures maker Games Workshop (GAW), global testing and certification firm Intertek (ITRK) and construction software specialist Elecosoft (ELCO:AIM).

QUALITY INNOVATION PLAY

Another pair of open-ended funds that have the quest for quality at the heart of their approach are Guinness Global Innovators (BQXX3K8) and TM Cerno Global Leaders (BF00QK6).

The latter aims to achieve returns, net of fees, in excess of the MSCI World Equity index on a three-year rolling basis. Its largest holdings include luxury goods conglomerate LVMH, air compressor manufacturer Atlas Copco and lager leviathan Heineken.

Guinness Global Innovators is a global growth fund providing exposure to companies benefiting from innovations in technology, communication, globalisation or innovative management strategies.

Managed by Ian Mortimer and Matthew Page, the concentrated portfolio of 30 equally weighted stocks extended its outperformance in the second quarter of 2020, generating a total return of 27.6% versus 19.8% from the MSCI World index; this resilient, quality-oriented portfolio outperformed during the savage sell-off witnessed in this year’s first quarter.

Mortimer and Page insist innovative companies outperform on account of their faster profit growth, larger profit margins and less susceptibility to cyclical pressures.

In terms of quality, Mortimer and Page only invest in companies with good, and ideally growing, returns on capital and strong balance sheets. ‘The quality element is really important for us,’ Page informs Shares. ‘We tilt towards companies that are not only able to grow, but able to grow profitably. A key metric we look at is cash flow return on investment.’ The net debt-to-equity of the portfolio is around 9%, versus 90% for the MSCI World index.

The COVID-19 pandemic has accelerated growth prospects in the near-term for companies in a number of the fund’s themes, such as advanced healthcare, payments and cloud computing, while also improving the long-term growth prospects for companies in the clean energy, sustainability, robotics and automation themes.

Mortimer and Page look to buy good growth companies at reasonable valuations and specifically avoid paying too high a premium for expected future growth, as this is inherently less predictable. Its portfolio includes PayPal, Infineon, Nike, Amazon and Lam Research.

‹ Previous2020-07-23Next ›