A systematic take on quality investing

Here at Julius Baer, a small, passionate team made up of fundamental buy-side analysts with a taste for quantitative methods redefine quality for equity investing. We spoke with Baris Pinar, Head Global Excellence, and Daniel Obradovic, Senior Portfolio Manager at Julius Baer, about how they tell the ‘real thing’ from an overnight success, and what it takes to gain investors’ trust in times of market stress.

Baris, Daniel; your team is responsible for the ‘Global Excellence’ strategy at Julius Baer. Can you explain what this stands for?
Baris Pinar: “Global Excellence is an investment strategy, which emerged as our answer to the financial crisis of 2008. Investors’ trust was shaken in even the most well-known brands that are seemingly built on solid ground. People were selling their positions as if in wholesale. But this phenomenon also appeared before these times, when one pauses to consider the rise and fall of some of the greatest companies in the global business history. This prompted Julius Baer to develop an equity offering, which would provide risk-managed performance over generations. This is how ‘Global Excellence’ was born.

Many investors nowadays forget that volatility belongs to equity investing.

Daniel Obradovic: “History showed us that power is transient and that even the mightiest can fall. Think about Rome, Egypt (the Old Kingdom), the Hittites – even Britain (I am not referring to Brexit, but the time that preceded their position of superpower which lasted for centuries). With ‘Global Excellence’, we aim to capture most of the market recovery, but also try to ensure that no invested company will go out of business should the next crisis occur.

Speaking of financial crisis, what do you think about the volatility in the markets and investors’ rising concerns?
Baris Pinar:We do not predict short-term market and stock price directions. We are poor short-term forecasters and so are most other investors. We simply have to accept the market volatility and take advantage of it. More importantly, especially in those times, it is better to be extremely cautious and not get caught up in stress signals. To keep your head cool and position your portfolio for the long-term. The beauty of a sound investment process removes the need to predict the market and moves portfolio positioning from speculation to investment. Think of companies like Hermès, Mastercard or Danaher, where the share prices experienced unprecedented declines, only to recover again and confirm their leadership status in their industry.

Daniel Obradovic: “I think many investors nowadays forget that volatility belongs to equity investing and that drawdowns are seldom the beginning of the end. We see volatility and drawdowns as opportunities for the patient long-term investor.” 

 

The team analyses structural changes in industries and keeps a close eye on the fundamentals of stock holdings

We also believe in mean reversion of profitability, i.e. that a stock’s return on invested capital will reverse to the industry average over mid- and long-term. This is what makes an active approach critical in the execution of our strategy. Nothing lasts forever, so we are paranoid about structural changes in the industries and keep a close eye on the fundamentals of stock holdings. Finally, since you mentioned value, these signals can look like obvious statements but need close scrutiny. Case in point – during economic slowdown, a quality stock might look like a value stock temporarily. We don’t take these signals at face value and put everything in the context of a long-term strategy. A holistic approach of various financial metrics is very important.”

‘Global Excellence’ reminds me of the book ‘In Search of Excellence’ by Tom Peters and Robert Waterman. It states that soft factors like people are more important than hard factors for the success of a business. Do you support this view as well?
Daniel Obradovic: “A strong people culture is a key asset for any company. We are living testimonials of that. We are a small, passionate team of stock pickers. We love our job and live our approach.”

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