The past decade has seen the quality style of investing outperform by a significant margin as years of ultra-loose monetary policy channeled investors into this type of stock.
One consequence of low interest rates and massive quantitative easing programmes has been a move from fixed income to equities, where investors tended to favour quality stocks – or more defensive businesses such as consumer staples.
FE Analytics shows that the MSCI World Quality index – which is made up of global companies with a high return on equity, stable year-over-year earnings growth and low financial leverage – posted a 330.93 per cent total return over the past 10 years, compared with a 246.52 per cent gain from the broader MSCI World.
Performance of indices over 10 years
Source: FE Analytics
Some consider so-called ‘bond proxies’ such as quality stocks to be expensive and ripe for a correction. Indeed, in the sell-off that dominated the final quarter of 2018, the quality style underperformed the broader index slightly and value stocks by a wider margin.
However, the promise of a continuation of more accommodative monetary policy from the world’s major central banks means the opening months of 2019 have been very different.
The MSCI World Quality index is up by 17.05 per cent since the start of the year, compared with 13.33 per cent for the MSCI World and 10.78 per cent for global value.
Below, Fidelity Personal Investing’s Daniel Lane highlights three global quality funds that have strong track records and are proving popular with investors.
Fundsmith Equity
First up is one of the best-known funds in the business: Fundsmith Equity, which is headed up by FE Alpha Manager Terry Smith.
Since launch in November 2010, the £16.8bn fund has generated a total return of 329.41 per cent, which ranks it first in the IA Global sector and is significantly higher than the gain made by its MSCI World benchmark. It’s also in the sector’s top decile over one, three and five years.
Performance of fund vs sector and index since launch
Source: FE Analytics
Lane said: “The foundation of manager Terry Smith’s style lies in selecting high quality companies, with strong brands, capable management and high barriers to entry for their products and services.
“If these firms can demonstrate high rates of return on capital, through increasing brand strength or cornering new markets, Smith will look to hold them for the long term.
“With the mantra ‘don’t just do something, sit there’ at the heart of the process, Smith keeps trading costs to a minimum by holding a concentrated portfolio of around 20-30 of these names, making a conscious effort to avoid chopping and changing companies in the fund.”
The five FE Crown-rated fund has heavy weightings to technology, consumer staples and healthcare stocks, with names such as Microsoft, Philip Morris and Novo Nordisk being found in the its largest holdings.
Fundsmith Equity has an ongoing charges figure (OCF) of 1.05 per cent.
Lindsell Train Global Equity
Next up is the £7.3bn Lindsell Train Global Equity fund, which is run by the FE Alpha Manager duo of Nick Train and Michael Lindsell alongside James Bullock. This five FE Crown-rated fund looks for companies with world-leading brands and franchises whose goods and services that are expected to remain at the top of their sector for decades to come.
This is another fund with a very strong long-term track record as its 296.42 per cent total return since launch in March 2011 is the second highest of the sector. It is also in the IA Global sector’s top decile over one, three and five years.
Performance of fund vs sector and index since launch
Source: FE Analytics
Close to 45 per cent of Lindsell Train Global Equity’s portfolio is in consumer staples stocks, with another 20.7 per cent in communications and 10.5 per cent in information technology. Unilever, Heineken and Diageo are its three biggest holdings.
“A similar attitude to Smith, Train makes it clear that watching daily share price gyrations holds no place in his long-term strategy. Rather, the manager focuses on owning a part of the underlying businesses in the portfolio who show the ability to reinvest profits in their own companies, generating further long-term returns for shareholders,” Lane said.
“Both students of the Buffett school of investing, Smith and Train look for unique businesses in control of their sector – a characteristic that leads to the large-cap space, especially in the sector setting Train apart from many peers; beverages.”
Lindsell Train Global Equity has a 0.74 per cent OCF.
Rathbone Global Opportunities
FE Alpha Manager James Thomson’s £1.5bn Rathbone Global Opportunities fund is another that has a significant weighting to information technology (21.3 per cent). This is based on the manager’s belief that the main priorities for CEOs is to stay on the leading edge of technology and keeping their offering relevant for the next wave of consumers.
“This sustainability in customer proposition that Thomson looks for in the sector is no accident – it is very much a part of his rigorous, considered approach to identifying good quality companies for the fund he has run for 15 years,” Lane said.
“Other ingredients in the manager’s ‘secret sauce’ include easy to understand businesses, companies growing quickly but sustainably, and prudent management teams with great vision for the future. He seeks out companies who are shaking up their industry but with positive long-term prospects rather than short-term fads.”
Performance of fund vs sector and index under Thomson
Source: FE Analytics
Thomson’s approach focuses on under-the-radar and out-of-favour growth companies; he also believes medium-sized companies are a “sweet spot”, even though they can be riskier holdings.
That said, he maintains a defensive bucket of holdings that are less economically sensitive with slower and steadier growth prospects, in order to manage the risk of the fund.
Top holdings include Amazon, MasterCard and Salesforce with financials, healthcare, consumer goods and consumer services being the largest sector exposures.
Since he took over the fund in November 2003, it has made a 601.26 per cent total return and is ranked fourth in the IA Global sector. It’s also in the peer group’s top quartile for one-, three- and five-year total returns.
Rathbone Global Opportunities has an OCF of 0.79 per cent.