Investors have had to contend with significant volatility in recent years, including a resurgence of inflation, high interest rates, and economic divergence. However, even as the economy looks poised for a soft landing, quality stocks can help weather economic cycles and trends by bringing time-tested resilience to portfolios.
Defining quality growth
Rather than paying out dividends, quality growth companies reinvest their earnings to grow their businesses for the future. This enables them to remain profitable over time and through economic cycles and evolving market environments.
By reinvesting capital these companies create additional growth drivers through innovation or product development, for example, and this enables them to grow and adapt over time.
A focus on sustainable profitability is key, but having a track record of consistent profitability, and in the future is a cornerstone of quality growth.
"For example, if a company grows its earnings at around 15% a year and it does that for 5 years, the compound return in terms of earnings will be that it doubles its earnings every 5 years," says Obe Ejikeme, Fund Manager of FP Carmignac Global Equity Compounders.
"Now where the compounding doesn't work is if it grows 15% one year and then it drops 15% the next and 15% up the year after that and so on. The consistency of the growth rate is one of the key things we look at when we talk about quality growth compounding," he says.
Offering shelter in challenging markets
In recent years, high inflation rates have presented a challenging environment for businesses. As costs rose, profit margins were squeezed unless prices rose sufficiently to offset rising costs.
However, businesses that can maintain or increase profit margins during inflationary periods reflect a company's market power. These quality companies produce a product or service that is so unique or significant that consumers will be prepared to pay more for it were able to raise their prices, and thereby maintain or even expand their profit margins.
A focus on quality also means investors can reduce their exposure to the most gross domestic product (GDP) sensitive names that are found typically in sectors like banks, commodities, and real estate.
"If investors own quality companies that have pricing power and the macroeconomic environment becomes challenging, investors can see how beneficial quality can be to their portfolios," he says.
"These companies have a track record of stable, high profit margins and reinvest their earnings in future growth," says Obe. Over the long-term, reinvestment allows these companies to maintain their dominant market position through innovation and they stay ahead of market, consumer, and technology trends.
Spotlight on quality
Quality growth can be found in healthcare and consumer staples for example, driven by the necessity for continuous innovation. In the healthcare industry, adapting to demographic shifts, such as the increasing aging population, is crucial. This requires ongoing advancements in medical technologies, pharmaceuticals, and healthcare services. Similarly, the consumer staples sector must innovate to keep pace with evolving consumer preferences and lifestyles, such as the growing demand for healthier food options, sustainable products, and convenient solutions.
High conviction quality growth
Novo Nordisk, a Danish pharmaceutical company with a century-long legacy in insulin therapy, is now a key player in the battle against obesity. The company is committed to investing heavily in research and development to address the growing prevalence of chronic diseases associated with urban lifestyles.
Procter & Gamble (P&G), a leading player in the consumer staples sector, has a rich history of innovation. The company's research and development capabilities have enabled it to anticipate and address changing consumer needs. From its early days with decongestant ointment to its groundbreaking inventions like disposable diapers and fabric softener sheets, P&G has consistently set industry standards.
Microsoft's strong financial performance is driven by its wide range of high-quality software products. The company's substantial profits are reinvested into research and development, particularly in areas such as artificial intelligence and gaming. Moreover, Microsoft's strong corporate governance, including its exceptional management team, contributes to its overall success.
Quality-driven growth investing offers a disciplined approach to stock selection. By focusing on companies with stable and high financial performance, robust competitive positions, and promising reinvestment, investors can build resilient portfolios with the potential for outperformance.
Main risks of FP Carmignac Global Equity Compounders
Equity: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization. Currency: Currency risk is linked to exposure to a currency other than the Fund's valuation currency, either through direct investment or the use of forward financial instruments. Discretionary management: Anticipations of financial market changes made by the Management Company have a direct effect on the Fund's performance, which depends on the stocks selected.
The Fund presents a risk of loss of capital.
Investment horizon: 5 years
Risk indicator: 6/7
Source: Carmignac, 31/10/2024. SRRI from the KIID (Key Investor Information Document): scale from 1 (lowest risk) to 7 (highest risk); category-1 risk does not mean a risk-free investment. This indicator may change over time.
Marketing communication. Please refer to the KIID/prospectus of the Fund before making any final investment decisions.
This document was prepared by Carmignac Gestion, Carmignac UK Ltd or Carmignac Gestion Luxembourg and is being distributed in the UK by Carmignac Gestion Luxembourg. FP Carmignac ICVC (the "Company") is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the Financial Conduct Authority with effect from 04/04/2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the "ACD") of the Company and is authorised and regulated by the Financial Conduct Authority. Registered Office: Second Floor, Hamilton Centre, Rodney Way, Chelmsford, CM1 3BY, UK (Registered in England and Wales under No 4162989). Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd, has been appointed as a sub-Investment Manager of the Company. Carmignac UK Ltd (Registered in England and Wales under No 14162894) is authorised and regulated by the Financial Conduct Authority (FRN:984288).
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CARMIGNAC GESTION 24, place Vendôme - F-75001 Paris - Tél : (+33) 01 42 86 53 35 Investment management company approved by the AMF Public limited company with share capital of € 13,500,000 - RCS Paris B 349 501 676
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