SPECIALISTS IN HIGH QUALITY STOCKS & BONDS

At Atlanta Capital, we specialize in managing portfolios of high quality stocks and bonds. The term ‘high quality’ is often portrayed as a broad characterization of the financial strength or credit worthiness of a company. However, Atlanta Capital maintains a more strict definition of high quality. Our equity portfolios invest in companies with a demonstrated history of consistent growth and stability in earnings. In fixed income, we emphasize securities with stable and predictable cash flows, and low credit and event risk. We believe strict adherence to our high quality definition, regardless of changing market conditions, has preserved the integrity of our investment style for over 40 years.

Investing Beyond the Nine-Square Style Box

For many years, investors have diversified their equity portfolios by both market capitalization (large, mid-, or small) and investment style (value, core, or growth), hence the popular nine-square style box. The basis of this approach is the theory that large- and small-cap, and growth and value stocks explain most of the variation in equity returns and, although individually risky, dampen risk when aggregated within a portfolio. However, our research indicates that ignoring quality and investing solely by capitalization and style dimensions is unwise. In fact, the performance of high and low quality stocks can have a significant influence on an investor’s risk and return characteristics, in many cases overwhelming the influence of either size or style.

Distinguishing Between High and Low Quality Stocks

In general, most investors deem high quality stocks to be those with steady, consistent earnings growth, modest debt to equity ratios, and above average returns on invested capital. It’s not surprising that companies with these financial characteristics typically have seasoned management teams and strong competitive positions in their key markets. Low quality stocks, on the other hand, are those with erratic or highly cyclical earnings, heavy debt burdens, and poor returns on capital. Typically these companies have less experienced managers, less dominant market positions, and are (on average) smaller in size and have shorter track records as public companies.

S&P Earnings and Dividend Rankings

The Standard & Poor’s Earnings and Dividend Rankings (also known as “quality rankings”) score the financial quality of several thousand US stocks from A+ through D with data going back to 1956. The company rankings are based on the most recent 10 years (40 quarters) of earnings and dividend data. The better the growth and stability of earnings and dividends, the higher the ranking.

S&P quality rankings provide investors a useful time series for measuring trends in the performance of high and low quality stocks. The rankings are not infallible, but they are unbiased and empirical and have been calculated the same way for a lengthy period of time. Atlanta Capital does not rely solely on the S&P ranking system in determining a company’s eligibility for investment, but believes that the growth and stability of earnings and dividends are key elements in scoring the financial quality of a common stock.

Quality Compares Favorably to Size & Style Investing

As shown in The Periodic Table of Investment Returns, over the past 30 years ending 2011, the 11.9 percent compound annual return generated by high quality stocks represents the highest absolute return in comparison with large- and small-cap, and growth and value stocks.  Given the performance advantage inherent in high quality stocks, a strategic allocation to "high quality" could reasonably be expected to enhance an equity portfolio's total return.