Quality shares in the focus of institutional strategies

From growth fantasies to fundamental excellence

After years of dominance by high-growth technology companies, a structural change is taking place on the global capital markets: institutional investors are increasingly focusing on quality companies with sustainable competitive positions, stable cash flows, and resilient business models. This paradigm shift reflects not only a change in risk perception, but also the search for long-term robust returns in an increasingly volatile market environment. Please note the opportunities and risks associated with investing.

How do you define a quality share?

The term “quality share” (or quality stock) was coined by Benjamin Graham, the founder of fundamental analysis. In the modern portfolio context, “quality investing” describes an independent investment style characterised by the following features:

Sustainable earnings power: companies with stable margins, high return on invested capital (ROIC), and above-average return on equity (ROE)
Competitive advantages: deep economic “moats” through patents, brand strength, network effects, or regulatory barriers to entry
Balance sheet quality: solid debt structure, high free cash flow, and conservative capital allocation
Crisis resilience: low cyclicality of demand, high pricing power, and operational flexibility
However, there is no guarantee that this investment style will lead to positive returns.

These characteristics make quality shares attractive to long-term institutional investors who value stability, transparency, and predictability.

Examples of such companies are:

Microsoft (USA): dominance in the cloud and software sector with continuous innovative strength
ASML (Netherlands): technology leader in semiconductor lithography with a monopoly-like market position
LVMH (France): global market leader in the luxury segment with iconic brands
Roche (Switzerland): strong position in oncology and stable earnings
TJX Companies (USA): resilient business model in off-price retail
Booking (USA): strong market position in travel and holiday services
Aena (Spain): airport operator with locations in Spain, the UK, and Latin America
OTIS (USA): global building equipment supplier (lifts/elevators, escalators) with high-margin service business

The companies listed here have been selected as examples and do not constitute investment recommendations. There is no guarantee that the securities will remain in the portfolio on a permanent basis.

Valuation and allocation

Compared to growth shares that command high valuations, many quality shares are trading at a moderate valuation premium or even a relative discount despite their fundamental strength – especially in periods of elevated market risk. This opens up selective entry opportunities for investors with a disciplined, fundamental selection process.

Warren Buffett puts it in a nutshell:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“

Portfolio construction: quality meets diversification

Empirical studies show that even a concentrated portfolio of 20–25 high-quality shares can provide a good risk/return profile. However, losses are still possible. Erste Asset Management pursues a selective bottom-up approach in its quality strategies, complemented by sector and geographical diversification. The aim is to create a focused portfolio with a high degree of conviction and, at the same time, robust risk management.

Our investment process in three steps

Investment universe

The investment universe consists of around 5,000 shares. From these, we select only the best 20% from industrialised countries worldwide. This results in a shortlist of about 1,000 shares.

Fundamental equity research

Once these 1,000 shares have been identified, we engage in fundamental equity research. In doing so, we consider the following factors:

Positive earnings momentum: this means that the company's earnings are likely to increase
Attractive valuation: the company commands a good (i.e. attractive) valuation
Positive economic value added: the company creates more value than it incurs costs
Good Piotroski F-score: the company has good financial indicators
Classic quality criteria: the company meets well-known quality criteria
Positive technical chart indicators: the share price performance looks good
Minimum rating of A- from major rating agencies: the company has a rating of at least A-

Portfolio construction

We then select the 25 best shares for the concentrated equity portfolio. This portfolio looks as follows:

Large and mega caps: large companies
Equally weighted: all shares have the same weighting
When a new asset is added, it replaces an existing asset. A new share replaces an existing one
Country and sector weighting: the selection of shares determines the distribution across countries and sectors
Foreign currency not hedged: exchange rate risks are not hedged
No derivatives: we do not use no financial products derived from other assets
No benchmark: there is no benchmark for performance comparison

Quality strategies of Erste Asset Management

Erste Asset Management offers institutional investors access to three differentiated quality strategies:

ERSTE STOCK QUALITY: focus on global quality companies with stable business models and a solid financial foundation.
ERSTE STOCK QUALITY VALUE: combination of quality and value approach to identify attractively valued quality shares.
ERSTE STOCK QUALITY OPPORTUNITIES: opportunistic approach focusing on high-quality companies with low to medium market capitalisation.

For explanations of technical terms, please visit our Fund Glossary.

Disclaimer

This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to Art 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to Art 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the website www.erste-am.com within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the website www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to Art 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.