Proudly owning a diversified portfolio stays a precedence for me. Even so, I can’t deny I’ve a desire for high quality development shares.

Right now, I’ll clarify how I’m going about investing in them.

Diamonds within the tough

What do I imply by ‘high quality’? Properly, that’s at all times going to be subjective. Ask 10 Fools and also you’ll in all probability get 10 Silly solutions. Personally, I search for:

• A aggressive benefit (eg manufacturers)
• Low/no debt
• Huge margins
• Increased-than-average returns on capital
• A historical past of standard and rising dividends

An instance of a inventory I believe matches this standards is FTSE 250-listed Video games Workshop (LSE: GAW).

The agency is a pacesetter in a distinct segment market and advantages from a fanatical following with deep pockets. It has internet money on its stability sheet, working margins of round 35%, and returns on capital employed of round 60%. It often hikes its dividends too.

This isn’t to say that its share worth can’t tumble. Certainly, homeowners would have seen their stakes roughly halve in worth between September 2021 and September 2022.

For me, this simply comes with the territory of investing. However this volatility received’t go well with everybody.

Another technique

There’s a neater method of investing high quality shares, particularly let another person do it on my behalf.

One identify that springs to thoughts is supervisor Terry Smith. By the top of March 2024, Smith had delivered an annualised return of 15.8% since organising Fundsmith Fairness in 2010. Evaluate that to its benchmark (MSCI World Index) of 12% and you may see why he’s so in style. It doesn’t sound like a giant distinction, however it’s when compounded over a few years.

That mentioned, even Smith has underperformed in recent times, attributable to his avoidance of tech juggernauts like Nvidia. And, naturally, he’s charged a (not-insignificant) charge alongside the best way.

Talking of value…

Going passive

A less expensive choice is to make use of an exchange-traded fund (ETF). An instance is the iShares Edge MSCI World High quality Issue. Because it sounds, it is a passive fund. This implies the portfolio’s run in accordance with pre-set guidelines quite than the whim of a human supervisor.

Not that this needs to be seen as a limitation. Anybody shopping for on the peak of panic in March 2020 would now have doubled their cash. By comparability, the FTSE 100 index has delivered a return of 54% (excluding dividends).

An additional profit is that my cash’s unfold throughout nearly 300 corporations. Smith’s fund has simply 28 holdings, arguably making it a far riskier proposition. Then once more, holders outperform when his picks do effectively.

No ensures

Personally, I exploit all three approaches detailed above. I’ve cash invested with a choose band {of professional} cash managers (Smith included) and one other pot of money in passive funds with a high quality bent. And since I discover the problem of choosing shares intellectually stimulating (to not point out sometimes profitable), I personal just a few single firm shares that neither of the above do.

After all, shopping for high quality development shares is not going to make me wealthy in a single day. No technique will do that. And something that does sounds extra like playing to me.

However proudly owning the perfect the market has to supply for so long as attainable appears like one thing I can keep on with. And isn’t that the purpose?