Focus on balance sheet strength during turbulent times
Focusing on those high-quality companies with strong balance sheets has helped small-cap managers during the pandemic.
During the first quarter of 2020, strong balance sheets became the most-important factor of focus in the face of an economic downturn.
The Eaton Vance small-cap team said they used an approach of quality, valuation and timing (QVT) when it came to selecting stocks for portfolios. It particularly favoured those companies with healthy balance sheets which had been purchased at attractive free cashflow yields
Aidan Farrell, head of global small cap equities at Eaton Vance, said: “Our QVT investment philosophy is biased toward higher-quality companies with healthy balance sheets, irrespective of the economic cycle. The aim being not only to ensure healthy capital appreciation when markets rise, but also to exhibit a degree of capital preservation in times of challenge.
“Financial strength allows a company to better withstand periods of economic uncertainty, while at the same time amassing capital that can be deployed to strengthen its strategic position, often during periods of uncertainty."
Farrell noted markets had begun improving over recent weeks and there were steps being taken to re-open economies but the pandemic would still likely have longer-term implications.
“Investors are taking hope from the enormous monetary and fiscal policy responses across the world, and the first tentative steps by some countries to reignite their economies by easing stringent lockdown measures. In the short term, until a vaccine or effective treatment for COVID-19 is developed, equity market sentiment will be shaped by the path the virus takes and any additional policy measures applied,” he said.
“Irrespective of the duration and shape of recovery, we firmly believe that we will look back at factor returns in 20 years’ time and once again see that higher-quality companies with will be a winning strategy for investors.”
AUTHOR
Laura Dew
Recommended for you
LGT Wealth Management is maintaining a neutral stance on US equities going into 2026 as it is worried whether the hype around AI euphoria will continue.
Tyndall Asset Management is to close down the Tyndall brand and launch a newly-branded affiliate following a “material change” to its client base.
First Sentier has launched its second active ETF, offering advisers an ETF version of its Ex-20 Australian Share strategy.
BlackRock has revealed that its iShares bitcoin ETF suite has now become the firm’s most profitable product line following the launch of its Australian bitcoin ETF last month.
