Some of the best ideas aren’t new

We don’t know how markets will perform in the near future, but we do know that in these difficult times investors are seeking greater security and transparency in their investments. Emilio Gonzalez, Group Executive, Global Equities, explains why a disciplined approach of focussing on quality companies at attractive prices can offer some protection.

In 1934, Benjamin Graham and David Dodd wrote Security Analysis, the classic investment theory text which today is still widely accepted as the foundation for fundamental investing. Graham and Dodd also lectured in economics, with Warren Buffett one of their most successful and well-known students. When analysing companies, these fathers of fundamental investing said that the “greatest losses result not from buying quality at an excessively high price, but from buying low quality at a price that seems good value”.

Graham and Dodd believed that focusing on the characteristics of a company (called company fundamentals) such as balance sheet strength, dividend yield, visibility of earnings and management experience allowed for better and more profitable investment decisions.

Perpetual has a similar belief when managing and investing our clients’ money. While valuation is key to the way we invest, quality always comes first, as not every company that appears cheap will perform well over the long term.

Perpetual's Australian and International share funds

Our investment philosophy of investing in quality Australian and global companies at attractive prices, to us, is more than just a motherhood statement or a marketing term. It is a belief that underpins our investment philosophy and one we apply when managing our clients’ money. Irrespective of the latest fad or fashion, our fundamental investment philosophy has never altered.

When looking to invest in quality Australian and global companies at attractive prices, we focus our attention on those companies that exhibit characteristics including:

Looking closely at the balance sheet strength and capital structure of companies, in particular, has helped our performance, as we’ve avoided those companies with high levels of debt whose value is now being eroded by the recent market volatility.

The benefits of a fundamental approach

This fundamental approach to investing has allowed our Australian equities team to generate consistent outperformance over the long term (see chart below).

Chart 1 – A focus on company fundamentals pays off
($50,000 invested in Perpetual's WealthFocus Industrial Share Fund since Dec 1993)
Chart 1

Source: Perpetual. Returns have been calculated using exit prices after taking into account all of Perpetual's ongoing fees and assuring reinvestment of distributions. No allowance has also been made for taxation. Past performance is not indicative to future performance.

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Our global equities team has also significantly outperformed over all time periods (as at 31 December 2008), since taking over management of our international share portfolio in March 2005.

Companies we view favourably

With investors now looking far more carefully at the risks associated with their share investments, companies offering greater security and consistent, long-term returns are now back in favour, which we believe will continue for some time.

The Australian Securities Exchange (ASX) is one that we have added to our Australian share portfolios, as it is a quality company we have liked for some time, whose valuation has recently become very attractive.

ASX has one of the cleanest balance sheets in the market, with no debt and plenty of cash. While reduced trading volumes will impact earnings this year, the company remains highly profitable, operates in a near monopoly, has a business model that is easy to understand and a proven management team – all very attractive attributes given the uncertain times.

Within our international share portfolio, Nestlé is just one of several diversified global companies that demonstrate many of the strong quality characteristics we like to see at a good price.

As the world’s largest food and beverage company, Nestlé owns the dominant brand in many product categories including breakfast cereals, beverages, dairy products, pet care and baby food.

The company has an impressive record of consistent earnings growth, excellent shareholder focus and 12 consecutive years of margin improvement (through price increases without impacting sales), and is one of our key long-term holdings that continues to perform well.

Quality really is your best protection

While there is no crystal ball that will tell us how markets will perform in the near future, in these uncertain and difficult times investors are looking for greater security and transparency in their investments, and will be for some time to come.

We believe that a disciplined approach of focusing on quality companies at attractive prices gives investors:

Just as it was when Graham and Dodd first published their ideas in 1934, this ‘old’ approach to investing is the key to making better and more profitable investment decisions for investors now, and in the future.

To learn more about the Australian and international share funds we offer, please contact your Perpetual Account Executive.