WS Guinness Global Quality Mid Cap Fund

The Fund is designed to provide investors with exposure to quality mid cap equities exposed to structural growth themes. We believe this provides investors with a differentiated exposure to future leaders with growth driven by long-term demand drivers such as improved health and wellbeing, resource management, and innovative technologies.

Although the fund is designed to invest in sustainable companies, our starting point in selecting our investment universe is to identify companies with persistently high and/or improving return on capital. Specifically, we look for two separate – but not distinct – groups of companies:

• Established compounders that have a return on capital of greater than 10% in each of the previous ten years.
• Emerging compounders that have a return on capital of greater than 10% in each of the previous 5 years with that return on capital growing across the previous 5-year period.

Our analysis shows that established and emerging compounders are highly likely to continue generating persistently high return on capital in the future. Consequently, it shows emerging compounders are highly likely to turn into established compounders in the future. Together, they show that these businesses will continue to create shareholder value.

“It's a rare achievement for a company to meet our investment criteria and we think it shows a mark of genuine quality. And this is where our portfolio starts – consistent high return on capital.”

On average, only 5% of global listed companies achieve our threshold. We then exclude highly leveraged businesses (net debt/EBITDA > 3), leaving a pool of around 650 companies.
 

We find that companies exhibiting quality characteristics, as described above, positively correlate with better ESG scores, using MSCI ESG research methodology. Hence, we find that by first screening for high quality businesses, we indirectly exclude many businesses that have been deemed to have below average or inadequate management of ESG issues.

We also apply exclusionary screens to filter out companies whose products or services are harmful, and whose ESG practices are sub-standard. Namely we exclude companies which derive more than 10% of revenue from:

• Adult Entertainment
• Alcohol
• Fossil fuels
• Gambling
• Nuclear energy
• Palm oil
• Tobacco
• Weapons

We also exclude those companies which have been scored as a laggard (B or CCC rating) by MSCI and those on the Norwegian Council of Ethics exclusion list. Such businesses tend to display inadequate or worsening management of ESG issues and are vulnerable to ESG-related disruptions and controversies.
 

Mid cap companies occupy a unique position in the investment landscape, combining the resilience of established businesses with the dynamism of growth-oriented firms. These companies are often under-researched and underutilised by investors – no more so than today with the overconcentration of indices and funds in a narrow set of mega-cap businesses. We believe mid caps represent a “sweet spot” for equity investing. 

Mid caps have outperformed both their large and small cap counterparts over 25 years (MSCI indices) by growing their earnings and revenues faster – and with a better return/risk ratio. 

The above screens leave the investible universe with around 500 companies from which to seek our 30 best ideas for the portfolio.

Mid cap companies are defined as companies having market capitalisations between the smallest and largest market capitalisations of companies included in the MSCI World Mid Cap Index. The Fund intends that the companies whose equity securities are held by the Fund will meet this definition when initially purchased by the Fund.

From this universe, we then seek to identify which companies are the most attractive long-term investment propositions. We apply screening and utilise scorecards based on quality, growth, and valuation to prioritise candidates for extended due diligence.

Fundamentally, we seek businesses capable of outgrowing the broader market. In addition to seeking growth through a mid cap lens, we also seek companies exposed to structural growth themes, as these areas have long-term demand drivers driven by changing consumer preferences, social norms, and changing government regulations.

To do so, we look for companies with the majority of the business activity exposed to at least one of the following themes:

1. Health
2. Wellbeing
3. Safety & Security
4. Cleaner Energy
5. Resource Management
6. Innovative Technologies

Above all, we want to understand what competitive advantages or barriers to entry are sustaining a company’s return on investment to determine whether the returns will persist. We also recognise that sentiment and hype can sometimes drive up the valuations of growth companies and so we try to maintain a strict value discipline. We want to avoid paying up for high levels of expected growth in the future, and therefore use a variety of valuation tools including looking at valuations vs sectors, peers and the company’s history, as well as looking at the quality and growth metrics baked into a company’s valuation relative to alternatives.

It is often easier to find companies to buy that look cheap than it is to identify those companies you own which should be sold. We consider sell discipline as important as selecting companies for purchase and continuously monitor the companies we hold in the Fund. The six core reasons we may sell a company are outlined below.

1. The company no longer offers exposure to structural growth
   - The company now derives a material portion of revenue from harmful products
   - The company’s ESG practices have deteriorated materially
2. The balance sheet becomes stretched
3. The valuation becomes too rich, or no longer offers compelling upside
4. There is a change in a company’s capital budgeting approach
5. Our original investment thesis no longer holds
6. We find a more compelling investment idea