We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Looking for quality – a HL Fund Manager’s view

HL's Head of Equity Funds talks about how the HL Select management team look for quality companies.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Buying shares in companies listed on the stock market can come with high reward, but also high risk. Wars, recessions, company mistakes and more recently global pandemics can lead to big swings in the value of your portfolio.

Even well-managed companies can face challenges from time to time. But if a business starts from a position of strength, it’ll be better placed to cope with the occasional bump in the road.

Steve Clayton, HL’s Head of Equity Funds, talks about how the HL Select management team find high-quality companies, and looks at three examples.

Remember this article isn’t personal advice. If you’re not sure which investments are right for you, speak to one of our financial advisers.

All investments fall as well as rise in value, so you could get back less than you invest.

What is quality?

The search for quality is all about finding companies that are well-managed, market leading and have plenty of cash. Quality businesses should be able to do well during good times, and leap-frog weaker rivals when times are tougher.

Searching for high-quality businesses can be an interesting strategy when investing in shares. It’s the cornerstone of the HL Select fund management team’s process.

Quality can come in many (but definitely not all) shapes and sizes. Here are some of the characteristics we look for.

Conservative approach – this is about how the business is structured and managed. Avoiding companies that rely on single events going the right way in uncertain times. Things like political events or interest rate changes.

Plenty of cash and low debt – The pandemic has shown us that nobody knows what’s round the corner. Borrowing too much at the wrong time could all end in tears. Cash reserves can keep companies ticking over if they go through a rough patch.

Long-term view – scanning the horizon and preparing for changes further down the line. As an example, the shift to online shopping meant lots of high street retailers have struggled. But while some companies could be facing administration, other companies could benefit from reduced competition.

Share research – is less competition automatically good news?

Returning customers – the company’s goods or services should be essential to their customers. This allows companies to charge higher prices as it knows customers will return. It should also choose who supplies their products – this helps keep costs low.

Profit margins – this is how many pennies a company makes for every pound it spends, often expressed as a percentage. The less companies need to spend to make money, the better. 2020 reminded investors that cash is king.

Life-long businesses – the highest-quality businesses evolve to stay ahead of a changing world. Take Microsoft as an example, Windows and Office still rule the roost. But they didn’t stop there and went on to develop leading positions in newer markets like cloud computing and video gaming. That’s quality in practice.

Where to look for quality in 2021?

The arrival of vaccines have raised hopes of economic recoveries around the world – lifting share prices hard hit by the pandemic. Some quality names are being overlooked in this “Dash for Trash”.

How much quality companies earn and pay out to shareholders will still be there, long after the “Dash for Trash” has faded. This is why the HL Select team are so focused on identifying high quality stocks that we can own for years to come.

Here are some examples of quality stocks we own across our HL Select Funds.

Unilever – the consumer-goods giant is a classic defensive stock – companies that tend to thrive regardless of the economic backdrop.

Unilever’s ability to evolve is what sets it apart from the pack. The company has invested heavily to keep brands fresh and relevant to customers. The group owns lots of famous household brands like Persil and Lynx.

Pernod Ricard – the group’s portfolio of aged spirits are leaders in the faster growing developing markets which bodes well for long-term growth opportunities. In the short-term, sales should benefit from the gradual reopening of hospitality worldwide.

Visa – cash is so 2019. The switch to digital money is well underway and Visa’s global network is a huge part of this. The pandemic has accelerated this switch. The company doesn’t lend money. It just links spenders, their banks and the merchants they shop with together – taking a piece of the pie each time a card is used.

Find out more about HL Select funds

Investments can fall as well as rise in value so you could get back less than you invest, especially over the short term. Information provided about individual companies is our view as managers of the HL Select funds. It is not a personal recommendation to invest. If you are at all unsure of an investment’s suitability for you please seek personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Help us make our articles easier to read

Take a few minutes to help us improve the fonts we use by giving us your feedback on a sample article.

View sample article

View sample article

View sample article

View sample article

View sample article

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Editor's choice – our weekly email

Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

  • Latest comment on economies and markets
  • Expert investment research
  • Financial planning tips
Sign up

Related articles

Category: Markets

Next week on the stock market

What to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

Sophie Lund-Yates

03 Dec 2021 4 min read

Category: Shares

Mining shares – what to look for

We look at what investors need to know when looking at mining shares.

Matt Britzman

02 Dec 2021 5 min read

Category: UK Funds

Investing in active and passive funds – when and how to blend them in a portfolio?

We take a closer look at active and passive fund management and how the two strategies could work together.

Alex Watkins, Passive Investment Analyst

01 Dec 2021 4 min read

Category: Shares

Baillie Gifford US Growth Trust: November 2021 update

In this investment trust update, Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, cost, and performance of the Baillie Gifford US Growth Trust.

Joseph Hill

01 Dec 2021 6 min read