Our approach to quality assessment is a key differentiator between Ubique and most other Australian share funds. In assessing quality we look for the following seven attributes:
- Capable, experienced and sensible management;
- The businesses of the company are easy to understand;
- The company has a good track record of earnings;
- The company holds a competitive position in its industry;
- Reasonably stable industry dynamics;
- No material environmental, social, and corporate governance (“ESG“) issues; and
- The company can comfortably service and refinance its debt.
In assessing the companies capacity to service debt we consider the company’s forward Interest Cover (which we define as: EBIT/Net Interest) in relation to its sustainability of earnings (Note: Banks are assessed differently).
Unlike some managers, we don’t have a ‘one size fits all’ Interest Cover rule. Our rationale is that a lower Interest Cover for a very dependable earnings stream may actually be a safer investment than a highly cyclical company with Interest Cover that meets a strict rule during a favourable time in the cycle. Typically we will look for Interest Cover to be above 2.5x for a very dependable earnings stream (such as consumer staples, food retailing or utilities) and above 3.5x for more cyclical earnings.
If the company meets these quality requirements, we will then include the company in our Investment Universe register. It should be noted that this is a dynamic process, with companies regularly assessed to determine whether they meet our quality criteria.
In the event that a company in which the Fund has an investment no longer meets our quality criteria, or we become aware of a material ESG issue that the company refuses to address or cannot address, then the position will be divested in an orderly manner and the company excluded from our Investment Universe.