Global Quality Strategy

Global Quality Strategy

Global Quality Strategy


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

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.


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.


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%.


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.


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
Identify High Return Companies
  • High 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
Make Sure Returns are Sustainable
  • Ability to remain relevant through powerful intangible assets including brands and networks, sustaining high barriers to entry
  • Returns sustainable against material threats or improvable through material opportunities, including Environmental or Social factors
  • Dominant market shares helping to protect against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Geographic spread
  • Steady organic growth and geographic spread
Confirm management's commitment to sustaining returns
  • Focus on returns on capital rather than sales or EPS growth
  • Capital discipline (reinvest at high returns or return the excess capital to shareholders)
  • Commitment to innovation and investment in franchises
  • Review management incentives
  • Sound Governance structure
  • Engagement on material issues or opportunities where relevant, including ESG factors
  • A focus on free cash flow, not accounting numbers
  • FCF yield, DCF, EV/NOPAT