One man’s trash is another man’s treasure

One man’s trash is another man’s treasure

One of the things that keeps the equity markets interesting is the way different investment attributes fall in and out of fashion. For example, in recent times we have seen a marked preference for large, dividend paying stocks, which we expect is a reflection of record low interest rates, and a quest for better income returns with low perceived risk.

A slightly less obvious development has been a move by the market away from high quality companies and into lower quality issues.

Quality has different meanings for different people. At Montgomery we have a clearly defined but unique set of rules that define quality. Other investors apply different rules to try to capture the same basic idea – essentially high quality implies a high likelihood of delivering consistent earnings, and a low likelihood of financial misadventure (and tends to be unrelated to company size or profile).

We were interested to see some analyst commentary recently highlighting that high quality companies have delivered lower investment returns than their low quality brethren of late. Our internal analysis using our own quality measures yields the same conclusion – the market has indeed been more enthusiastic in its support of lower quality companies.

The really interesting thing for us however was the way others interpreted this analysis. One line of thinking was that if quality is out of favour, then investors should avoid owning quality businesses and focus their portfolios at the other end of the scale.

Needless to say, this line of thought is not one we support. Rather than dancing to the tune of the latest fashion trend, we think it is preferable to have some fundamental principles and stay true to them. This might result in some short-term underperformance, but in the long run we have no doubt that it will deliver the right result. That’s a trade-off than anyone with an investment horizon measured in years instead of months should be happy to accept.

MORE BY TimINVEST WITH MONTGOMERY

Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.