Strategies
Active Fundamental Equity
Global Quality Strategy
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Global Quality Strategy |
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Strategies
Active Fundamental Equity
Global Quality Strategy
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Global Quality Strategy
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The team believes there are two key tenets to investing: first, that the best route to long-term returns is through compounding and providing a measure of relative downside protection; and second, that high quality businesses can generate strong returns over the long term. Such businesses are typically built on dominant market positions, underpinned by powerful, hard-to-replicate intangible assets that can generate resilient, high, unlevered cross cycle returns on capital. Other characteristics are: resilient revenue streams, pricing power, typically low capital intensity and the opportunity for organic growth.
These companies are rare. High quality management is critical. When evaluating the quality of a management team, we seek evidence of disciplined capital allocation and distribution practices, as well as remuneration or incentive policies aligned with their shareholders.
The team’s primary worry is about permanent loss of capital rather than relative risk; losing money is worse than missing the chance to make it. The team does not worry about tracking error, short-term macro noise or the latest fad. Instead, risk is managed first and foremost at the company level, aiming to avoid companies where any form of franchise, regulatory or management risk that could result in diminishing returns. The team also believes there is an inherent risk of overpaying for high-quality companies. Consequently, the team uses ongoing and rigorous fundamental analysis to assess the fair value of each stock. According to the team's research and their investment philosophy, only 200 to 250 companies meet their quality standards.
DEFENSIVE CHARACTERISTICS, COMPOUNDING POTENTIAL |
| The team’s research shows investment in high-quality companies, which exhibit characteristics such as strong franchise resilience, high and recurring cash flow generation, low capital intensity and minimal financial leverage, have historically generated strong risk-adjusted returns across various market cycles. |
TEAM OF PATIENT INVESTORS |
| The team’s long-term investment horizon seeks to allow these rare, high-quality compounders to capitalize on their financial characteristics, leverage their well-managed intangible assets and compound shareholder wealth over time. The average annual turnover of the Strategy is expected to be 20% to 30%. |
WE FOCUS ON MANAGING THE RISKS THAT MATTER |
| The team believes that quality compounders are less vulnerable to economic volatility, while indices, in their view, are inherently risky. They believe that relative measures of risk fail to capture the chance of losing money. Accordingly, they seek to minimize loss of capital and focus on the resiliency of a franchise, while trying to avoid any company which exhibits any deterioration in management quality, its financial health or its valuation. |
A STRONG HERITAGE |
| With an unchanged and disciplined investment philosophy stretching back well over 20 years, the team knows quality when it sees it. |
| 1 | Identify High Return Companies |
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| 2 | Make Sure Returns are Sustainable |
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| 3 | Confirm management's commitment to sustaining returns |
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| 4 | Valuation |
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Team members may be subject to change at any time without notice. The investment team currently has 15 members; information on additional team members can be found on MSIM.com.