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Amber Sinha, I’m a senior portfolio manager, global equities with CIBC Asset Management.
A high-quality company for us is basically a company with a good track record, with sustainable competitive advantages, and run by a good management team, a management team that has their interests well aligned with the rest of the shareholders. If we have a combination of these two, of a great company with sustainable competitive advantages and strong management, we expect two more things to flow out of that combination. Those would be higher returns — so what good is a company with competitive advantage and good management if it can’t generate high returns? — and the second thing is a conservative balance sheet.
Now conservative balance sheets are not so much in vogue right now. During economic expansions, people don’t really care. Especially given where interest rates are, a lot of companies have taken on more debt and used that funding for different purposes.
Given our style and mandates, we tend to be conservative with balance sheets, so we will give more credit to companies that are less relying on using the low rates right now to take on more debt. But just having a conservative balance sheet… Because regardless of where we are in the expansion right now, there will be a downturn and the winners by far in a downturn are those with conservative balance sheets.
So again, that in essence defines a quality company for us: sustainable competitive advantages and a proven track record, strong management, higher returns and conservative balance sheet.
You look for these things within the MSCI world, you throw a bunch of other constraints added as well in terms of whether the company… You want to make sure the company is not very cyclical. So we want companies that make money throughout the economic cycle, just not at the top. We have given the size of our mandate, we have some constraints around how small the stocks can be, how liquid they have to be. So if you work with all these constraints, you end up going through a screening, filtering process that results in 300, 400-odd stocks.
So from the 300, 400 stocks, we use our valuation framework to look at stocks that look undervalued and have a catalyst around them. Again, working with the large universe of the MSCI world, there is always talks that have price dislocations for some reason. So as long as we see a price dislocation, we see a catalyst, we see that devaluation is attractive and that the stock has… there is room in the portfolio for a company like that, then it moves on from the list of 300 to 400 stocks to the best 40, 50 ideas from that 300, 400 which is essentially our portfolio.
One we like in the U.S. is Ross Stores, which is an off-price retailer. And Ross and another of their competitors, TJ Maxx have made a business out of buying stuff from retailers that didn’t sell. So it’s overstock or for whatever reason it didn’t sell. Now the department store every season has to have the latest fashions in there, so they have to get rid of this stuff. They get rid of it, they sell it to Ross and TJ at a discount, and then Ross and TJ Maxx will sell it at their stores at a discount to consumers.
A lot of consumers don’t really care about having the latest fashion on their bodies all the time, so they’ll go with the fashion from last year if they get a decent discount on it. So great value proposition for investors, for consumers. And again, they are in a business where they’re cleaning up the inefficiencies and these inefficiencies will always be there. So I think it’s a great business, great management, no debt on their balance sheet, very high returns — pretty solid one.
In Europe, again, we like Airbus and again we’ve seen Boeing go through challenges in the last six months. The investment case for us at Airbus is fairly independent of what’s going on in Boeing. So this is not a sell Boeing by Airbus type of recommendation or a thought process. Airbus, I think on its own, has great merit. They have a great product suite, they have gone from 0% market share to more than 50%. They’re marginally ahead of Boeing right now. So it’s been a great European success story and that success has come through a fundamentally strong aviation market and good product development and innovations.