Winning businesses: the future isn't what it used to be - questioning a static definition of quality

“QUALITY” IS AN investing style that is widely referred to in the asset management industry. It has also proved to be an effective marketing slogan – perhaps this is because “buying quality”
would seem to be self-evident. After all, who would openly admit to preferring the alternative? The term is also aspirational, evoking a feel-good factor that makes it an easy choice for clients.
However, it is a term that is seldom fully explained or quantified, leaving it open to interpretation. It is also often backwards looking, relying on metrics that a company has delivered in the
past. In a world of disruption driven by accelerating technological change, we choose rather to focus our attention on “winning businesses” – that is, companies that are fit for purpose in the
modern world. This article elaborates on our thinking.

A TRADITIONAL ASSESSMENT OF QUALITY

So, what makes a company high quality or low quality? A traditional assessment would consider factors including the strength and heritage of its brands, its products’ pricing power and the
industry barriers to entry. These inputs ultimately allow the business to earn a certain return on invested capital (ROIC), which is the key consideration behind a traditional quality assessment.
The ability of a business to compound earnings at high returns on capital rightly is, and will always be, one of the key determinants of quality. Other important factors to consider include its
ability to convert earnings into cash flows, the predictability of its earnings or range of outcomes, and the quality of its management team. Many of these inputs are, however, backward looking
and don’t necessarily tell us all we need to know about what will happen in the future. Looking back at history, companies that tick these boxes have understandably received a lot of
interest from investors. Many are household names with strong brands, and their products are often defensive, with ongoing demand irrespective of macroeconomic conditions.                                                                                                                                                   Read full article: https://www.coronation.com/en-za/personal/latest-insights/investment-views/Winning-businesses-the-future-isnt-what-it-used-to-be-july-2025/

August 18 2025 By Chris Cheetham - Coronation