Global Quality Strategy
Global Quality Strategy

Global Quality Strategy

 
 
 
Summary

The Morgan Stanley Global Quality Strategy is a concentrated global equity strategy. To achieve the investment team’s aim of compounding shareholder wealth at attractive rates of return over the long term, the Strategy focuses on high-quality, resilient, well-managed companies.

 
 
Investment Approach
Philosophy

The team believes there are two key tenets to investing: first, that the best route to long-term returns is through compounding and providing a measure of relative downside protection; and second, that high quality businesses can generate strong returns over the long term. Such businesses are typically built on dominant market positions, underpinned by powerful, hard-to-replicate intangible assets that can generate resilient, high, unlevered cross cycle returns on capital. Other characteristics are: resilient revenue streams, pricing power, typically low capital intensity and the opportunity for organic growth.

These companies are rare. High quality management is critical. When evaluating the quality of a management team, we seek evidence of disciplined capital allocation and distribution practices, as well as remuneration or incentive policies aligned with their shareholders.

The team’s primary worry is about permanent loss of capital rather than relative risk; losing money is worse than missing the chance to make it. The team does not worry about tracking error, short-term macro noise or the latest fad. Instead, risk is managed first and foremost at the company level, aiming to avoid companies where any form of franchise, regulatory or management risk that could result in diminishing returns. The team also believes there is an inherent risk of overpaying for high-quality companies. Consequently, the team uses ongoing and rigorous fundamental analysis to assess the fair value of each stock. According to the team's research and their investment philosophy, only 200 to 250 companies meet their quality standards.

 
Differentiators
DEFENSIVE CHARACTERISTICS, COMPOUNDING POTENTIAL

The team’s research shows investment in high-quality companies, which exhibit characteristics such as strong franchise resilience, high and recurring cash flow generation, low capital intensity and minimal financial leverage, have historically generated strong risk-adjusted returns across various market cycles.

TEAM OF PATIENT INVESTORS

The team’s long-term investment horizon seeks to allow these rare, high-quality compounders to capitalize on their financial characteristics, leverage their well-managed intangible assets and compound shareholder wealth over time. The average annual turnover of the Strategy is expected to be 20% to 30%.

WE FOCUS ON MANAGING THE RISKS THAT MATTER

The team believes that quality compounders are less vulnerable to economic volatility, while indices, in their view, are inherently risky. They believe that relative measures of risk fail to capture the chance of losing money. Accordingly, they seek to minimize loss of capital and focus on the resiliency of a franchise, while trying to avoid any company which exhibits any deterioration in management quality, its financial health or its valuation.

A STRONG HERITAGE

With an unchanged and disciplined investment philosophy stretching back well over 20 years, the team knows quality when it sees it.

 
 
 
Investment Process
How Quality Works–the Power of Compounding
 
How We Identify Compounders
1
Find High Return Companies
  • High and unlevered returns on operating capital employed (ROOCE)
  • High gross margins (pricing power)
  • Capital-light business models driving free cash flow (FCF) generation
  • Strong balance sheet
2
Make Sure Returns are Sustainable
  • Intangible assets – portfolio of strong brands, copyrights, licenses or networks, which act as high barriers to entry
  • Returns sustainable against material threats, including Environmental or Social issues
  • Dominant market shares helping to protect against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Geographic spread
  • Steady organic growth
3
Check Management Looking to Sustain Returns
  • Committed to innovation and investment in franchises
  • Focus on returns on capital rather than sales or EPS growth
  • Capital discipline (reinvest FCF at a sustainably high ROOCE or return the excess capital to shareholders)
  • Appropriate management incentives
  • Sound Governance structure
 
 
 
 
Investment Team
Head of International Equity Team
26 years industry experience
Managing Director
24 years industry experience
Executive Director
20 years industry experience
Executive Director
20 years industry experience
Executive Director
16 years industry experience
Executive Director
18 years industry experience
Executive Director
10 years industry experience
Executive Director
8 years industry experience
Vice President
11 years industry experience
 
 
 
 

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