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Archive for the ‘Quality Stocks’ Category

Interview with Terry Smith

Terry SmithTerry Smith, the CEO of Tullett Prebon and founder of Fundsmith, was in top form when I interviewed him last week. An edited version of our conversation, which covers a range of topics, including the global economy, the impact of QE, current market valuations and stocks in the Fundsmith portfolio, appears in today’s issue of Money Week. If you are interested in reading the full length version, you can find it on the Independent Investor website. Simply follow the link to Money Week articles on the right hand side. Sample quote: ā€œIā€™m not convinced there is a recovery ā€“ certainly, not of anything like the magnitude that people say there is”.

Written by Jonathan Davis

November 1, 2013 at 12:14 PM

Why quality stocks pay off

It is no accident that some of the best performing fund managers of the last few years have been those who have stuck to investing in powerful global equities with a consistent history of profitability and sustainable earnings and dividends. In the UK those who fall into this camp include Neil Woodford at Invesco Pereptual, Nick Train of Lindsell Train, Sebastian Lyon at Troy Asset Management (mentioned in my last post) and Terry Smith, whose equity funds solely buy and hold this kind of high return on equity stock. It is also of course at the root of Warren Buffett’s long success as an equity investor.

But why do so-called quality equities (defined as stocks which have low leverage, high returns on equity and consistent earnings) perform so well, yet are so regularly overlooked by the majority of investors in favour of more speculative growth stories? A recent research note from Jeremy Granthamā€™s team at GMO uses long run US data to highlight the persistently superior performance of quality stocks and their particular attractions in today’s binary (“risk on, risk off”) market conditions. The primary driver behind this superior performance is the ability of these companies to preserve and grow capital, not to lose or squander it as many do, either through incompetence or normal competitive pressures.

Here are a couple of short extracts from the GMO research paper:

True competitive equilibrium is a rarity in the global economy. Instead, we find persistent winners and persistent losers. The competitive paradigm says that highly profitable activities attract capital, and that capital flees those with low profits. This is the market mechanism behind mean reversion, which is supposed to close the profitability gap. In reality, certain companies earn persistently high returns on equity. Superior returns are delivered to investors in the form of dividends, stock buybacks, and accretive growth.

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Written by Jonathan Davis

August 18, 2012 at 12:17 PM