1. Long-term Quality Investing has performed well
Quality investing has provided very good returns during the last 20+ years. Of course, history is not a guarantee of the future, but carefully chosen quality companies are well situated to succeed in the future as well. Therefore we only want to choose very high-quality companies for Sifter portfolio and own them for a long time.
When we talk about quality, we refer to the quality of the company’s business model, its competitive advantages and cash-generating capability.
2. Quality investing gives peace of mind
Owning quality business gives a peace of mind especially during unexpected stock market crises. Market volatility is not a risk for quality investors. Although the share prices of quality companies may fall during market correction, their core business have often not deteriorated. In our mind Sifter investors can feel safe that even in market corrections when they own high-quality companies.
Having peace of mind prevents making hasty buying or selling decisions. That’s why we like quality.
3. A disciplined investing strategy contributes more quality investments
To be successful in quality investing, the investment process must be crystal clear and disciplined. We think this sets Sifter apart from other funds. Sifter’s systematic investment process has proven to produce very good results for over 18 years.
Our experience has helped us to improve the process and find new quality companies for our portfolio, often with lower valuation and greater potential.
4. Limited number of quality companies
We believe that having a limited number of companies will increase the returns of our Fund and reduce the risks. We do not believe quantity replaces quality. For us a portfolio of 25-30 companies is appropriate. In our highest conviction companies we may hold up to 8% weight. Often, the success of these largest investments has resulted in excess returns for the Fund. Correspondingly, in our view a larger number of companies brings risk into the portfolio.
We believe that the Fund’s investors risks will be reduced when we know our companies accurately.
5. Focus on one fund
We believe that by focusing one can excel. When the focus breaks down into multiple funds or strategies, none of them get full attention. Sifter Fund deserves 100% of our attention and therefore all our actions and time is dedicated to the Fund. Also our own money is invested in the Fund.
Our strategy is to make the Sifter Fund a preferred long-term equity solution for the investor in all market situations.
What we don’t believe and where we do not invest
The investment strategy can also be viewed from the perspective of what we do not do.
- For example, we do not invest in commodity-related companies such as the oil or gas industry or companies which don’t comply with our ESG policy.
- We do not invest in banks or credit institutions.
- We avoid strongly cyclical business models such as construction companies.
- We do not use debt or derivatives or lend our shares.
- In addition, we have found that hedging currencies does not bring additional returns to our investors and would unnecessarily divert focus from important company analysis.
- We don’t believe in market timing we believe in time in the market.
Quality of the investment process
The quality of the investment process is another, at least as important part to consider, as the quality of the company. The investment process defines:
- what kinds of investments are pursued,
- how they are analysed and purchased,
- when the assets are divested.
With disciplined and clear investment process, it is possible to trust that it will also yield the right outcomes, i.e. investments in quality companies. There is no room for emotions and guesswork.
Our proprietary Stocksifter tool analyzes the 65,000 companies that are available to us on the stock market on the basis of 20 criteria and then eliminates 92% of them. Our analysts can then dedicate their time to the best companies that have passed our stringent and systematic screening process.
Quality company identification and selection criteria
There are more than 20 numerical metrics in the Sifter Fund selection process that we use to analyze companies. The criteria can be divided into numerical and qualitative selection criteria.
Numeric superiority factors are historical facts
The identification of a quality company is always based first on numerical facts, which make it clear that the company has already demonstrated superior financial ability historically. Numeric superiority factors indicate that the company has potential.
- Turnover grows steadily
- Net profit is increasing and predictable
- Gross and net margins are higher than among competitors
- High return on invested capital (ROIC over 15 %)
- Healthy balance sheet, preferably a net debt-free company
However, numerical superiority indicators are only history and therefore the heaviest workload for a quality investor is to study the company’s qualitative advantages, which could enable a year-on-year increase in earnings.
Qualitative superiority factors enable future success
When we find a potential quality company among thousands of candidates we analyze the company’s business using qualitative criteria. Qualitative superiority factors enable future success and most often explain the company’s higher profits than its competitors.
- The earnings model has a clear competitive edge
- High barriers to market entry
- The products and services are critical to customers
- The product represents a minor share of the customer’s total costs
- A large share of the revenue is recurring
- The company’s products possess pricing power
- There is growth in the industry
- Seasoned management team and strong company culture
Typically, a study like this takes weeks to months. After all this research, it remains to be verified whether the investment is profitable or not. In other words, it would be a little silly to buy top quality without getting it at a reasonable price.
What are the business metrics of Sifter portfolio?
Changes in the stock market cannot be predicted. Guesses go wrong more often than not. For this reason, a long-term quality investor should focus on analyzing and monitoring the companies’ business metrics.
The table below describes the median metrics for Sifter’s 30 companies. When we are searching for new companies for our portfolio, we want that investment to improve the business metrics of our portfolio. This enables us to strengthen our portfolio continuously.
As the table shows, most metrics have remained steadily high from year to year. Key metrics compared to S&P 500 companies (5 years):
- Return on invested capital (ROIC) has remained high for years and more than double vs S&P 500 companies.
- Operating margin is very high and stable and clearly better vs S&P 500 companies.
- Net sales growth rates have mainly been higher vs S&P 500 companies.
- The companies in Sifter’s portfolio are, on average, debt-free, unlike the S&P 500 companies.
- Sifter’s portfolio companies are on average slightly more expensive (EV / EBITDA) vs S&P 500 companies.
Sifter makes long-term quality investing easy
Selecting and analyzing companies requires a lot of time and expertise as well as a disciplined process. Because of this, Sifter has only one fund that gets all our attention.
The investors in the Sifter Fund are individuals, family offices, institutions and foundations who want to invest in quality companies in the long run.
Our investors prefer Sifter Fund because it provides a easy access to high quality companies globally and proven investment method.
To whom Sifter Fund is suitable for?
- You don’t aim for quick wins, you believe in stable money making
- You don’t have time to search, analyze, and monitor companies globally
- You want to own high-quality businesses in the long run