Adviser-to-client template: The ‘reset’

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Dear Client,

I would like to discuss the importance of quality at times like today. As we transition through an ‘economic reset’, it’s important to note that this unusual period can bring opportunity for those that that take the time to understand what it can offer investors.

First, let’s discuss what we mean by quality and why it matters. Quality can mean different things to different investors. As your adviser – and to Morningstar, who manage your investments – we seek to express quality at the total portfolio level.

A quality portfolio, by our definition, is when the total blend is better than the sum of its parts, therefore empowering your financial success. The key to delivering quality outcomes is to create robustness by understanding the areas that could stand to gain, and to manage through the inevitable setbacks.

The media certainly doesn’t help the average investor, often using scaremongering language and changing their titles on any given day.  With these examples over the last few months, it’s little wonder people that people are concerned:

In truth, there are always negatives we need to navigate. Yet, there are positives too. Our job is to be realistic. For example, inflation is coming down and interest rates are nearing their peaks across most of the developed world, offering investors better income-generating opportunities. Jobs are holding up. Many businesses remain profitable, some wildly so. And the average consumer is still spending and saving, despite the cost-of-living crisis.

To balance, we do think it is a wise idea to focus on quality at the current time. When I look at your portfolio, I’m reassured of its robustness and believe it is well placed to deliver over the longer-term. For example, we are pairing defensive assets with growth-oriented assets to ensure we have complementary return drivers. We are keeping overall fees low, where sensible. Also, we can move with the environment, ensuring we adapt to changes in market conditions.

There is a famous saying that the highest-quality businesses don’t always make the best investments. Right now, some so-called ‘quality’ assets (like treasuries) offer excellent value and we certainly hold them. But other ‘quality’ investments (including companies with a high return on equity) are quite expensive and higher risk than usual. In such a scenario, it can make more sense to buy unloved assets (with the appropriate sizing) that could become wonderful investments, despite not meeting the standard perceptions of quality.

Nobody can argue with quality. It is intuitive, desirable and something we certainly seek to embed in everything we do. It is our hope that you see it the same way.

If we can help with anything relating to the above, or if you would like to review your financial plan, please let me know as I would be delighted to help.

Kind regards,

Adviser

Context Regarding ‘Quality’ Equity Assets

*Below, you can see how the ‘quality factor’ has performed (as the purple box), which includes companies that rank well on the selected criteria of; a) high return on equity, b) low debt to equity, and c) low earnings variability. But as you can see, this does not always result in quality outcomes. If you go back over time, the quality factor has been like a yo-yo, delivering anything from -31.2% to +34.4% in a year. We seek quality portfolio outcomes, not quality labels.