Investments, Strategy

Identification of quality of most benefit

Quality stocks

Investors should look to buy quality shares and assess this characteristic in the context of where a particular company is headed in the future.

A domestic fund manager has emphasised the importance of investing in quality stocks and pointed out the difficulty in identifying equities that satisfy this criteria.

Magellan Financial Group core environmental, social and governance and international strategies portfolio manager Elisa Di Marco told attendees of the recent Australian Shareholders’ Association 2023 Investor Conference in Sydney: “Not all definitions [of quality stocks] are equal. And why is that? It’s because company fundamentals can mean a range of things. They can be an indicator of where a company has been, but also an indicator of where a company is going.

“So in our view you can’t just be using historical ratios to have a view on whether or not a company is quality and [worthy of] investing in. You should be looking at the company fundamentals, but through a forward looking lens.”

Di Marco revealed there are several characteristics Magellan searches for in a company indicating it is one of quality. One such element is whether it is the beneficiary of barriers to entry.

“This is the ability for the company to defend its market share and to prevent competitors from coming in and really eating its lunch,” Di Marco said.

According to Di Marco, an example of a quality organisation due to barriers of entry is Microsoft.

“I imagine [Microsoft Office] is something that is probably installed on everyone’s computer. Now have you thought in the last 10 years: ‘You know what, I’m going to try a competitor?’ No. And why is that? The barriers to entry are high because everyone knows how to use the Micorsoft Office suite, you have that internal knowledge so you’re unlikely to switch,” she noted.

She acknowledged brand strength as another indication of the quality of a company.

“This means what cachet does that brand hold. What does a brand [represent] to you? Does it represent trust [and] does it represent quality?” she said.

“Nestle is a great example of a company that has a really strong brand.”

Other characteristics that reflect the quality of an organisation include network growth, scale, pricing power and management excellence, she said.


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