First in a series of four videos focused around quality investing themes, produced by Vontobel Asset Management’s Quality Growth Boutique, subadviser to the Virtus Vontobel Funds.
Vontobel’s Quality Growth Boutique looks for quality companies with solid track records and strong brands. But, as CIO Matt Benkendorf explains, the most critical aspect of quality is earnings growth that is predictable and sustainable, as far as 10 years into the future.
Quality has become a very overused word in the last decade in investing. So I think it's important to define how we see quality and how we define quality at Vontobel.
Quality to us isn't just about market leadership. Often that is present in quality, but quality to us speaks more to the durability and competitive advantages of the underlying business.
Quality to us speaks of the attractiveness of the underlying economic returns in the business, whether that be a return on invested capital, a very wide margin, or extremely powerful free cash flow generation.
The most differentiating characteristic of quality, though, which we see in the Vontobel approach and what we're attracted to in quality has to do, though, with the predictability of earnings.
That's something that we think most investors often gloss over. They look for fast growth and they look for market leadership, but they often don't spend enough time focusing on how predictable will those underlying earnings be, both during periods of economic weakness, but also the sustainability of that earnings growth over a long period of time, because that's what ultimately leads into the outsized compounding returns in investing -- the ability to grow earnings at a high rate for a very long period of time.
And in a highly uncertain world, when you look at what is quality, you want to find companies where that earnings growth will be very predictable and hence reduce your risk of investing in that business.
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