What is Quality Investing? Investors who advocate a quality approach to investing prefer high-quality companies that generate free cash flow and a reasonable return on equity. Aside from that, investors consider other aspects of the business such as management stability, the uniqueness of the business model, and product reliability. While we previously discussed various investment styles such as Value, Growth, Dividend, ESG, Size, Momentum and Quality, this article will specifically focus on Quality Investing.
Investors are increasingly focusing on the concept of quality when making investment decisions. Compared to value or growth investing, quality investing, arguably, tends to receive less attention. While value and growth stocks can be defined using financial metrics, identifying quality stocks requires a more nuanced approach that takes into account a company’s overall business fundamentals, its competitive landscape, and long-term consumer trends.
One popular variation of quality investing is “quality at a reasonable price” (QARP)”. This strategy seeks to identify high-quality companies that are currently undervalued by the market, offering investors the opportunity to buy them at a reasonable price.
While the criteria used to identify a “quality” company can differ, some shared attributes typically include: –
- Strong financials: Companies that possess a robust financial position, characterised by a low level of debt, a healthy balance sheet, and strong cash flow, are typically regarded as being of higher quality when compared to those with weak financials.
- Sustainable business model: Companies possessing a sustainable business model and a strong competitive advantage are better positioned to maintain their market position and generate consistent profits over time.
- Consistent earnings growth: Investors are typically more attracted to companies that have a track record of consistent earnings growth, as this is indicative of the company’s ability to sustain its growth in the future.
- Management quality: Companies with competent management team that have a proven track record of making sound business decisions are generally considered to be of higher quality.
Using Quality Investing as a Strategy to Navigate Market Volatility
The global equity markets are currently experiencing significant uncertainty in the face of sticky inflation coinciding with US rate tightening fallout in the banking sector. As global growth is projected to slow down faster than anticipated, the yield curve is predicted to enter a bull steepening mode later this year. Consequently, there is a reasonably high probability of a considerable correction in global equities, as the market is yet to factor in an impending recession. Despite the possibility of Asia being affected by the global equity correction, the economic and earnings cycle for Asia is looking positive, with an early upcycle underway and earnings downgrades reaching a bottom. Moreover, the market is currently anticipating a decrease in interest rates in the near future, which would result in lower borrowing costs for both consumers and businesses. This development is generally perceived as positive news for equity valuation.
On the local front, while we expect the market to remain challenging in the first half of 2023, due to rising operating costs, higher interest rates, and slower global growth, we believe the downside will be limited by the local bourse’s undemanding valuations and China’s reopening of the border. Malaysia’s growth fundamentals remain encouraging, with firm domestic consumption, a stable labour market, sustained current account surplus, revival of construction projects, and expansion of primary sectors thanks to elevated global commodity prices and modest external trade activities.
Quality investing can be a valuable strategy for investors to navigate market uncertainty, as it involves identifying companies with resilient business models, strong financials, and competent management teams. Companies possessing these attributes often have a significant competitive advantage and may be better equipped to achieve sustained growth over time. This approach helps investors to investors to minimise potential losses during times of market volatility or economic uncertainty, potentially reducing the impact of market downturns on their portfolios.
Our Investment Approach and Offerings
At the core of our investment approach is a focus on stocks with strong fundamental characteristics, such as sustainable business models and consistent earnings. Additionally, we place significant emphasis on evaluating the management team of a company, as we believe that competent and visionary leaders are crucial for the long-term success of a business. Consequently, we only invest in companies where we have confidence in the competence and reliability of their management team.
This investment approach allows us to navigate through the challenging periods of market volatility and unexpected events, while maintaining a focus on delivering consistent returns to our investors over the long term. We strive to build resilient portfolios that can weather the storms and provide stable growth for our investors.
Figure 1: Stock Selection Criteria
Phillip Capital Malaysia offers a wide range of investment portfolios designed to meet your unique investment preferences and financial goals. Our local market offerings include PMART and PMA Blue Chip and Opportunity portfolios, each tailored to accommodate different investment styles and financial objectives. Our investment portfolio focuses on Malaysia’s companies that possess strong fundamentals, including stable earnings and a promising future outlook, and are led by capable management teams. We also offer both conventional and Shariah-compliant options to cater to the needs of all investors.
For investors seeking exposure to the global market, the PGWA World Leaders may be a suitable investment option. This fund is designed to provide exposure to companies that are leaders in their respective industries and have a strong presence in the global market. Click here to learn more about the PGWA World Leaders and its investment strategy.
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The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.