$4000

• A company may be growing its revenue, but not its free cash flow (i.e. top line growth, but no bottom line growth).
• A company may be growing its free cash flow, but have low returns on capital – and therefore requires a high level of leverage (i.e. growth dependent on high amounts of debt).
• A company may be growing its free cash flow by investing at high returns on capital, but lack the resilience to competition and economic cycles to ensure that growth can continue into the future (i.e. highly cyclical and no competitive advantages).
• A company may be highly resilient, but be operating in a declining market, meaning there’s uncertainty as to whether growth will continue (i.e. weak market economics).

Most quality funds and quality indices include a wide range of sectors, such as consumer staples, consumer discretionary, energy, materials and utilities. These sectors typically don’t have the high returns on capital, high FCF per share growth and specific types of competitive advantages (e.g. network effects, switching costs) that we’re looking for.

Our strategy seeks to avoid companies that sell directly to consumers and/or sell discretionary products. Instead we prefer to look for highly predictable and resilient free cash flow growth from companies that sell essential services directly to businesses. For that reason our portfolio is concentrated into payment systems, semiconductors, specialist software-as-a-service (e.g. cybersecurity), data providers and healthcare.

Short-term market volatility is inherent to equities. We think risk is best controlled through the selection of high quality stocks, not financial engineering (i.e. hedging/shorting). We select companies that aren’t susceptible to competitive threats, macroeconomic events and political and regulatory risk. We avoid companies with weak and highly-leveraged balance sheets. We avoid speculative investments, such as companies lacking a track record or going through a restructuring. We avoid speculative asset classes, such as currencies, commodities and derivatives. We also maintain a liquid portfolio, so that we can quickly sell out of a position if a company’s circumstances change or if there is high market volatility.

To ensure diversification we invest across a variety of sectors and industries (e.g. payment services, credit rating & scores, semiconductors, software and healthcare). Other sectors are too cyclical and capital intensive. The companies we invest in mostly have exposure to both developed and emerging markets, and therefore the fund is globally diversified despite only holding developed market stocks. We avoid individual positions taking up less than 2% of the portfolio, allowing each investment to make a meaningful impact on performance.