The Value of Quality

By almost any measure, the markets have cooperated with investors in 2017. Riskier investments have generated higher returns, and more conservative investments have plodded along, just as one might expect. In that sense, the markets have brought many investors comfort. There haven’t been many bumps along the way, and for the most part, the threat of a struggling economy and other investor preoccupations have faded from the collective view.

In keeping with the more risk, more return theme, investors in our Growth Portfolio fared best during the second quarter with a return in the quarter of 5.12%. This brings the year-to-date return to 12.05%. To provide context, the S&P 500 Index returned 3.09% and 9.34% over the same periods, respectively.* Likewise, investors in our Stable Growth Portfolio had a return of 4.25% and 11.10% for the quarter and year-to-date periods, and investors in our Dividend Growth Portfolio had a return of 3.95% and 10.39% for the same periods, respectively.**

These results show clearly the relationship of risk to return. In a rising market, we often expect to riskier investments to out-pace the broad market, and more conservative investments to deliver less. Of course, when the markets are languishing, we expect the opposite relationship, where more aggressive investments under-perform, and more conservative investments hold up well under pressure.

We cannot emphasize enough the importance of owning high-quality companies, and purchasing them when they are good values. This is the backbone of our process, and over time, it has led to solid results. Mutual funds and exchange traded funds, for all their benefits, haven’t been able to capture this approach because at its core, it is an active process. We actively seek quality companies, and we actively add and remove them from the portfolio when valuation warrants such changes.

These truths are no less applicable today than they were last year, or in years before. We are still in a rising interest rate environment, and though the pressure it is putting on the economy seems to be muted, it is pressure nonetheless. We are also sitting at a point of historically high valuations for stock investments, creating another potential headwind for investors, as it’s difficult for valuations to continue to rise when prices are already rich. By focusing on quality companies, and constantly striving to move away from expensive stocks toward ones which are a better value, we create a buffer for ourselves—our portfolio isn’t as richly-valued as the market, or as the average investor’s portfolio—and it gives us the best chance to see solid growth over long periods, when the markets are facing potential headwinds.

On balance, we like the direction things are going this year. The economy seems stable and as a nation, we have asserted our strength as a global leader, economically and politically. These conditions bode well for investors, but as encouraged as we are, we still want to be prudent about what, and when, we buy.

* The goal of the Growth Portfolio is to own a select group of high quality companies with good growth prospects, purchased at good values. Likewise, the goal of the Stable Growth Portfolio is to own a select group of high quality and stable companies, purchased at good values, and the goal of the Dividend Growth Portfolio is to own a select group of high quality companies which pay stable and growing dividends, also purchased at good values. Out-performing the S&P 500 Index is not the goal of any of our strategies, but showing performance relative to this benchmark provides useful context for understanding returns.
** Performance is shown net of fees. Past performance is not indicative of future results.