Square Mile: The top funds focusing on growth and quality


This article is part of a series that considers investment style and covers off growth and quality approaches.

Growth investing can be broadly classified as the process of identifying companies expanding sales and profits at a greater rate than nominal GDP.

Investors in such businesses can benefit from a double boost to the share price, firstly from rapidly climbing EPS and, secondly, a rerating of the stock. Typically the type of stocks targeted by the growth manager are either making rapid progress as their business models take off, or are longer-term stories where companies enjoy dominant positions in gradually expanding markets.

While the UK economy is a mature one, there are opportunities for businesses that are exploiting developing markets both domestically and abroad. For many years managers such as Nigel Thomas of Axa Framlington and Nick Train of Lindsell Train have carved out impressive performance records.

Thomas favours investment into companies that are generating above average growth in earnings and producing high cash returns on invested capital. The manager looks for organisations that have strong business models which should be capable of growth regardless of the direction of the economy. He prefers proven company management teams who have a history of operating in the best interests of shareholders and he will often follow successful teams from one venture to the next.

The investment philosophy followed by Lindsell Train is that truly exceptional businesses are persistently undervalued by the market. Such businesses tend to have high rates of return on capital and the reinvestment of profits into the business can compound into returns that can be impressive over the long term.

Furthermore, these companies are likely to produce attractive levels of cash with operations that do not continually require large amounts of funding.

Other highly regarded growth funds include Baillie Gifford Global Alpha, Baillie Gifford Japan, Threadneedle European Select and Legg Mason Clearbridge US Aggressive Growth.

Funds following a quality investment philosophy have benefited from strong performance tailwinds over recent years as investors have sought certainty in uncertain economic times.

Funds such as BlackRock Continental European Income and Evenlode Income are well worth looking at in this space, though firms such as Stewart Investors and Fundsmith have developed reputations as being doyens of the quality investment approach.

The Stewart Investors Asia Pacific Leaders fund follows a philosophy and process founded on the responsible stewardship of capital. The team seek to be long-term investors in the highest quality companies they can find.

To put it simply, they measure quality by looking at a company’s management team, its franchise and financial strength.

Fundsmith Equity takes a slightly different approach to its quality philosophy. The basic premise of this fund is to invest in high quality companies that are viewed to be attractively valued, as measured by the free cashflow yield, with reliable growth prospects and holding them for the long term.

The underlying philosophy and process share a number of characteristics with the Lindsell Train UK Equity fund, which goes to show that one shouldn’t get overly hung up when classifying funds. After all, a good fund is a good fund regardless of what colour a fund analyst paints it.

Jason Broomer is head of investment at Square Mile