As portfolio managers of the JPMorgan US Smaller Companies Investment Trust plc (JUSC), we often talk about our desire to invest in quality businesses. By quality, we mean companies with durable business models, strong financial characteristics and disciplined management teams.
We look for businesses with enduring competitive advantages and resilient positions within their industries. These are companies that we believe can sustain their relevance and pricing power over time.
Financial strength is central to our assessment. We seek consistent earnings, strong cash generation and high returns on invested capital (ROIC). A company that can generate cash and reinvest it at attractive rates should be able to grow sustainably and create value over time.
Management quality is just as important. We favour leadership teams who are thoughtful stewards of capital, who allocate resources carefully and who have demonstrated an ability to build long-term shareholder value. Alignment of interests and a clear strategic focus matter to us.
However, quality alone is not sufficient. When we have found a business that possesses these characteristics, we also apply a disciplined valuation framework. Even the strongest company must be available at a price that offers sensible long-term return potential for us to invest. Our objective is to combine high-quality businesses with an attractive entry point.
It is worth bearing in mind that no investment approach is guaranteed to outperform in all market conditions, and there have been periods when other characteristics have delivered stronger returns. Nevertheless, we continue to emphasise quality in our investment approach because of its long-term track record and the strong body of evidence supporting its role in sustainable value creation.
