Quality growth investing: How Mid Wynd International Investment Trust plc selects stocks poised for the future

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For many DIY investors, it can be tricky to distinguish genuinely good stocks from potential duds. How do you know if a company’s shares are reasonably priced? How do you determine if it will continue to grow or if it is already nearing - or past - its peak? How do you work out when is the right time to buy?

An investor’s dream is thus to identify companies that are poised for capital growth in the future. The fund managers at Mid Wynd International Investment Trust plc believe the key is all about “quality” and having the expertise to sift through thousands of stocks to find the ones which have what it takes.

Mid Wynd International Investment Trust plc was established in October 1981 with a focus on investing in quality stocks across the globe. Co-managers Louis Florentin-Lee and Barnaby Wilson took over management of the Trust in October 2023 and implemented their institutional Lazard Global Quality Growth strategy. This continued Mid Wynd’s tried-and-tested quality-first approach.

“Our investment philosophy is based on the belief that great companies can also make great investments,” explains Louis. “In other words, we believe that companies that sustain the highest levels of financial productivity outperform the market”.[1]

But what does “quality” mean at Mid Wynd International Investment Trust plc? Louis says it’s about companies that have “high levels of financial productivity that continue into the future,” emphasising that Mid Wynd looks to invest in stocks it believes will “generate high returns on capital and reinvest a significant portion of those returns back into the business to drive future growth”.[2]

They call these companies “compounders” at Mid Wynd, Louis explains, because over longer periods of time their cash flows compound. “This combination of high financial productivity and growth produces a compounding effect on cash flow and earnings, which we believe is particularly valuable. These types of exceptional businesses are often inefficiently valued by market participants, who are focused on near-term multiples rather than the longer-term earnings power of the company.”[3]

When it comes to identifying compounders, however, one needs to have a good eye for potential. It’s all about fundamental research and identifying companies with the fundamental characteristics of compounders – competitive advantages, high returns on capital, reinvestment, and attractive valuation.

Thanks to this long-term growth outlook, Mid Wynd International Investment Trust plc typically has a low turnover and prefers to stick to its convictions. Indeed, there were no buys or sells in Q4 2023 at all. The team maintained that “as the strategy invests in companies that can sustain their competitive advantages and compound returns over the long term, turnover is generally low”.[4]

So far in 2024, they have rejigged the portfolio slightly. One decision was to purchase Salesforce, which supplies customer relationship management software, where there was higher conviction relative to Computershare which was sold. Explaining the reasoning behind the move, Mid Wynd International Investment Trust plc said they believe the firm to be undervalued and so provides a compelling growth opportunity:

“We believe the company is undervalued as it has attractive exposure to secular growth in digital transformation investment, a leading, multiproduct suite strategy, and a sticky, recurring subscription revenue stream, with significant room for margin expansion”.[5]

The portfolio aims for diversification across sectors, industries, regions, and competitive advantages. The portfolio managers believe this is critical in delivering long-term performance.

Much has been made of the so-called “Magnificent Seven” tech stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta (Facebook) and Tesla. These mammoth tech firms have attracted a great deal of attention from investors over the last few years, helping to drive stock market returns higher and making headlines the world over. In fact, the seven stocks are the same size as the entire stock markets in the UK, Canada, and Japan combined.[6]

The overconcentration of returns in a small set of stocks and the sheer size of these companies means they have a disproportionate impact on the returns of various indices that track them, such as the S&P 500 and the Nasdaq. This lack of diversification makes near-term investment returns especially vulnerable to the fate of these seven (in)famous stocks. This impact was seen as recently as August 2024, when a slew of less-than-stellar results from big tech names helped to drive a market shake-up that saw the S&P 500 lose almost 5% at the start of the month.

The Mid Wynd International Investment Trust plc does have exposure to some members of this group, but not all. Among the top holdings in the portfolio are Microsoft and Alphabet (Google). At the time of writing, these stocks make up 5.3% and 3.7% of the portfolio respectively.

The investment team points out that much of the current concerns that tech stocks are overvalued is warped by the buzz around chipmaker Nvidia. “We certainly do not discount the power of AI, but we believe the market is ascribing most of its value to Nvidia alone, rather than to the many companies that are poised to benefit from this transformative technology. We expect that as the market realises the impact of AI beyond a handful of companies, it will broaden out, and a strategy such as ours, focused on financial productivity and valuation, will benefit in a more normalised market environment.”[7]

Accordingly, potential AI beneficiaries within the portfolio include Taiwan Semiconductor Manufacturing, one of the leading semiconductor producers in the world, and Accenture, a leading IT services company that can help corporate clients digitise and incorporate AI into their businesses.

Also, data-centric businesses such as RELX and Wolters Kluwer can integrate AI-driven services into their products and customer workflows with the potential for incremental revenues and stronger barriers to competition.

While the growth prospects are clear, investors should still be mindful of valuations. Barnaby commented: “While AI has the potential to transform the way companies operate over the long term, we are cautious that the exuberance surrounding the technology has the potential to drive valuations in certain stocks to unsustainable levels in the short term,” he says. “We remain focused on our philosophy of investing in quality companies that can sustain elevated levels of financial productivity.”[8]

In terms of absolute performance, Mid Wynd International Investment Trust plc has delivered 1-year GBP returns of +11.5% and 5-year returns of +43.4%*. It has a strong lead over its benchmark, the MSCI All Country World Index (ACWI), on a 5-year basis of +10.45%* despite trailing over the last twelve months +19.55%*. This longer-term growth is amplified the further back you look; Mid Wynd International Investment Trust plc’s 10-year returns have grown +213.20% against MSCI ACWI’s +11.92%*.[9]

Looking ahead to 2025 and beyond, the investment team believes there is plenty of reason to be optimistic given the fundamentals of the portfolio holdings and the diversification of quality companies. Also, its track record on dividend payments has seen the Investment Trust recently recognised by the Association of Investment Companies (AIC) as being one of the “Next Generation of Dividend Heroes” - investment trusts with 10 or more years of consecutive dividend increases. As of 2024, Mid Wynd International Investment Trust plc has 11 years of increases under its belt with a 5-year dividend growth rate of 6.53% p/a.[10]

In the Global Quality Growth Q2 2024 Strategy Review, the investment team maintained its shrewd attitude to stock selection paints a positive picture for the longer-term outlook. Nearer term, Mid Wynd has delivered +11.5% of 1-year absolute performance* – behind the benchmark perhaps, but nevertheless encouraging returns in the midst of unpredictable markets.

“Though recent [relative] performance has been challenging, in the context of a high-momentum market driven by hyper-growth tech names, we remain confident in our long-term investment approach and continue to believe that a portfolio of attractively valued compounding businesses should produce strong returns over the medium and long term.”[11]

Past performance is not a reliable indicator of future returns.

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*Performance figures as at end September 2024.

[1] Lazard, Global Quality Growth 2Q24 Strategy Review, July 2024

[2] The Association of Investment Companies, November 2023

[3] Lazard, Global Quality Growth 2Q24 Strategy Review, July 2024

[4] Lazard, Global Quality Growth 4Q23 Strategy Review, January 2024

[5] Lazard, Global Quality Growth 2Q24 Strategy Review, July 2024

[6] BNY Mellon, A Closer Look at Magnificent Seven Stocks, February 2024

[7] Lazard, Global Quality Growth 2Q24 Strategy Review, July 2024

[8] Lazard, Global Quality Growth 4Q23 Strategy Review, January 2024

[9] MSCI, October 2024

[10] The Association of Investment Companies, September 2024

[11] Lazard, Global Quality Growth 2Q24 Strategy Review, July 2024

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