How holding best of breed companies can offer defence against volatility – Gerrit Smit

Choose companies whose quality management will steer a course through storms

There are several ways that quality companies can provide shelter for investors during periods of elevated volatility, according to Gerrit Smit, Head of Global Equity Management at Stonehage Fleming Investment Management.

Over the last three years, the world has experienced its fair share of shocks, including a global pandemic, severe and widespread supply chain disruption, war in Ukraine, energy crisis and disruption in the banking sector. Last year was particularly brutal for investors when the Fed raised their target rate aggressively to bring inflation under control. The S&P 500 suffered its worst losses since 2008, closing 2022 down 19.4% on the previous year (Source: Reuters).

“Despite recent shocks and periods of extended volatility, there are good reasons to remain constructive”, Gerrit told guests at an investment presentation last week. “It not our approach to try to constantly reposition our portfolio for particular short-term cycles but rather to own the right businesses. That way, when that unforeseen circumstance or event occurs, we shouldn’t be in the difficult position of fearing what we hold”.

Manager of the Stonehage Fleming Global Best Ideas Equity Fund, Gerrit outlined how the fund’s investment philosophy enables the team to identify quality businesses according to four main strategic criteria: sustainable organic growth, efficiency, free cash flow generation and quality management. He highlighted the importance of these in the context of ensuring sustainable growth and thereby providing investors with confidence during times of uncertainty and increased market volatility.

“The protection we have is down to the quality and sustainability of the businesses. These businesses are capable of recovery after unforeseen events. That has occurred time and again and it happened again after last year.”

With ongoing geopolitical uncertainty, Gerrit stressed that investors in quality companies should not have to second-guess outcomes or respond to them. He re-emphasised that the best defence is to own businesses that possess those fundamental pillars of quality, particularly having a superior management team at the helm.

“We have a very global approach to investing which means that we buy best-of-breed business that themselves are globally diversified. We look for top class management teams with records of consistent success, strong strategy and a clear business sustainability culture. We trust them not only to identify opportunities wherever they may be but also to understand the geopolitical pressures they are under.”

High conviction of a quality management team is key in bearing out the right course of action, explained Gerrit. “We all have many uncertainties and reservations about different risks in different countries and find it difficult to get clarity on everything we would like to. The lowest risk approach is to identify best quality businesses where you trust management to gather the necessary information and make the right strategic decisions.”

Gerrit Smit is Head of Global Equity Management at Stonehage Fleming Investment Management. He established the Global Best Ideas Equity Management division in 2009 and is Portfolio Manager of the Stonehage Fleming Global Best Ideas Equity Fund.

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