“Quality is the best business plan”- John Lasseter, Pixar 
The market rally in the wake of the Covid-19 vaccines announcement was led by more cyclical businesses and, quite frankly, a number of companies that we consider to be low quality.
In the excitement of this ‘rotation into value’, many higher quality companies – and ones that we happen to favour (and have been reliable performers over many years) – were left behind.
Regardless, the best place to be in this current, coronavirus-dominated environment is in companies with high quality characteristics and benefitting from structural growth, regardless of their market capitalisation.
We define companies with high quality as those with high barriers to entry, strong cash flows and recurring revenue generation. These main characteristics set the quality companies apart from their value and momentum-screened peers.
These ‘best-in-class’ characteristics have performed strongly over the past decade, where the value in their IP, brands and core specialisms have driven earnings over the long-term but have also offered protection during periods of significant market volatility.
One such company is Halma, which we had a rare opportunity to add to on price weakness in late-2020. Halma has been a top 10 position in our portfolio for many years and we are more than happy to have topped-up our investment.
Another long-term holding that has had a challenging year is Shaftesbury, the owner of West End ‘villages’, including Chinatown, Carnaby Street and Seven Dials. Why? Their prime London assets are unique and irreplaceable. The business raised just shy of £300m to pay off its revolving credit facility in 2020, leaving it well capitalised to continue in its operations as the heart and soul of West End London’s nightlife.
It is remarkable how much emphasis is placed on short-term results by investors and (especially) market commentators and we believe we are nearing a period in which the short-term headlines for most businesses are going to look a whole lot better moving deeper into 2021. In our opinion, businesses like Trainline, Greggs, Beazley and Shaftesbury are far too good to be depressed for long.
London pub company, Young & Co. is another that falls into this category. Sales are predicted to have fallen a whopping 57 per cent in 2020, comfortably their worst year ever for sales decline. There is, of course, no timeline set out as to when we might return to some normality as yet, but even if in 2021 they returned to two thirds of their 2019 level, it would represent around 84% growth in 2021 alone. Broker consensus actually places this a lot higher at over 130 per cent - maybe optimistically for some, but when bars and restaurants do open, I can hardly envisage a quiet, orderly, trickle of serene customers ambling through the doors of their local, once vaccinated.
‘Short-termists’ should beware in the current environment. Quality, as Aristotle once succinctly put it, ‘is not an act, it’s a habit’ and many quality businesses will quickly return to previous levels of trading once we are on the downward slopes of the pandemic. When that comes, we expect to see some exceptional results and a more supportive backdrop for markets more widely.
Whilst many international stocks have performed strongly post the March 2020-lows, their UK competitors and peers have lagged. In some sectors, UK-listed names are now starting to gather momentum and catch up, but we believe that there is scope for plenty more recovery in UK equities. We are optimistic for UK equities in 2021 and are confident that quality UK companies will shine over the long term. As the old adage goes: the cream always rises to the top.
Fred Mahon is co-manager of the SVS Church House UK Equity Growth fund. The views expressed above are his own and should not be taken as investment advice.