BLOG: Why you should consider this recession-ready theme
This month marks the 40th anniversary of Chelsea Financial Services, which prompted me to have a trip down memory lane.
The major events of 1983 included Margaret Thatcher being re-elected as UK Prime Minister; the UK introducing the £1 coin; and Microsoft releasing the first computer mouse.
Perhaps, most interesting of all, is that the mighty Chelsea finished a lowly 18th in the second division of the football league (although I’m not sure we’re a much better team these days, despite all the money we’ve spent).
It also reminded me of a time when a certain eleven-year-old boy needed a new pair of trainers for the start of the school year. His mum decided how much could be spent (a number he was pleased with!) and off they went to buy a new pair. But much to his annoyance, when he got to the store, his mum insisted that he did not spend all the money on the pair he wanted, but instead bought a cheaper pair in the sale.
Fast forward eight weeks and this boy was ready to start his PE lesson at school when the teacher gave him a nudge – “I’m afraid your trainers have got a nice big hole in them, you’ll need to sort that out”.
The boy trudged home to his mum and told her that she needed to buy a brand spanking new pair of trainers only two months later – it did not go down well at all!
I’ll let you all guess who that boy was, but the lesson is that sometimes in life you must accept that you get what you pay for – buy cheap, you often buy twice – and it could cost you more in the long run.
Investing in quality companies
It brings me nicely on to quality investing. Quality companies tend to have barriers to entry; are led by strong management teams; maintain strong balance sheets; and exhibit the potential to maintain pricing power.
They are particularly relevant in this environment of heightened volatility because history shows these companies can still grow and take advantage of the instability among their peers in their respective sectors. All the talk of 2023 seems to be about quelling rising inflation and the impact of recession (if, when and how long it will last!).
While an emotional response from investors can hit these companies when markets initially sell-off, the characteristics of these companies mean they often bounce back quickly.
For example, although the MSCI ACWI Quality Index saw a max drawdown (loss) of 50% during the Great Financial Crisis (vs. 58.4% for the MSCI ACWI Index in general), it took around half the amount of time to recover those losses (778 days vs. 1,529 days). More recently, the index was quicker to recover following the Covid-induced losses.
The long-term performance is there for all to see. Despite the strength of growth companies (think of the large technology companies in the US like Amazon, Apple and Alphabet), the MSCI World Quality index has actually outperformed the growth index in the past decade (290% vs 261%).
So, with the threat of recession still looming, and inflation remaining stubbornly high in the likes of the UK, investors may want to consider an investment fund focusing on steady growing companies offering must-have – as opposed to discretionary – products and services.
Global investment portfolios worth considering include the Murray International investment trust, TB Evenlode Global Equity and BlackRock Global Unconstrained Equity – all of which are high conviction active strategies, with excellent track records.
Those looking for a regional bias might like the Jupiter European fund, which is a concentrated portfolio of 35-45 stocks. Managers Mark Nichols and Mark Heslop have excellent long-term track records investing in Europe and, importantly, have stuck to their process despite facing a number of headwinds.
You can even find a number of these quality businesses among smaller companies. The Liontrust Special Situations fund targets companies which must have intellectual property, a strong distribution network or recurring revenues. The fund has traditionally had an overweight to small caps.
Darius McDermott is managing director of Chelsea Financial Services