Limiting Our Universe to High Quality Companies
Within equities, our research shows that investing in high quality companies generates superior outcomes compared to any other strategy. This is because high quality companies are able to produce persistently high and stable profits independent of market conditions by controlling ‘fundamental risk’. As the returns earned by equity holders are ultimately driven by corporate profits, this results in superior stock returns with lower ‘price risk’ or volatility. Modern corporate finance theory would expect investors to receive higher rates of return on investment for bearing greater risk. With this view of the world, high quality companies appear to be an anomaly delivering higher returns with lower risk. This phenomenon is better explained by superinvestors such as Warren Buffet. These investors, instead, study the economic moat (competitive advantage) of a company and its ability to protect profitability from competitive pressures.