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Quality is possibly the most subjective factor you will come across and one that is likely to differ depending on who you ask. Unsurprisingly, most investors would claim that they are investing in quality businesses, yet the results can vary wildly across these strategies – so what is quality and how do we define it?

At Momentum we define quality businesses as those that have demonstrated a high and stable level of profitability over the long term. These businesses typically benefit from strong economic ‘moats’ (defendable competitive advantages) which enable them to sustain above average returns over longer periods. The businesses that fit these criteria generally have low capital intensity (with low reinvestment requirements), low leverage, strong cash flow generation and strong intellectual property such as brands.

When the human mind is confronted with a completely unexpected situation or an event that has not been experienced before, the brain immediately suffers what is known as a “startle effect”.

The COVID-19 pandemic showed authorities to be suffering that “startle effect”; delays to lockdown, would be partly explained by an inherent denial of the situation and initial expectations of a rapid return to normality were also subsequently dashed. We have also seen the dangers of that “startle effect” in the property market, Andrew Jones, the CEO of LondonMetric (who recently spoke at our 2021 Annual Think-Tank) has referred to the owners of high street retail property as holding “melting ice cubes”.

How investment managers achieve ESG integration varies, and any number of methods are acceptable under Sustainable Finance Disclosure Regulation (SFDR), but at a high level it usually boils down to one or a combination of (a) exclusions (for certain industries or controversial activities), (b) focussed impact investments (renewable energy for example) or (c) assessing all investments on their ESG criteria (effectively ensuring ESG characteristics are understood and ‘priced’ rather than simply focusing on traditional investment metrics). But as the ‘fifty shades of green’ suggest, the devil is in the detail.

Bonds remain expensive today, with yields across the ratings spectrum having tracked core rates lower. While core rates have lifted off their lows from last year (US 10 year yields got as low as 0.5% in August 20201), they remain unattractive at current levels. However, there remain areas of relative value within short duration high yield and dollar-denominated emerging market debt, as well as floating rate credit. Elsewhere, while there is limited upside from further spread compression, spreads are not at extremes, and hence there is no clear reason, from either a valuation or a fundamental perspective, why spreads should suddenly blow out. As a result, we retain meaningful allocations to those aforementioned areas of value, as well as some core investment grade credit.