Kernow September Letter: What Is Quality?

(MENAFN- ValueWalk) Kernow Asset Management 's commentary for the month ended September 30, 2026 with a down month of 0.1%.

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“We like to buy below-average companies run by bad management with a really short time horizon.”

...has never been said at an investment conference.

Every month, I compare our portfolio with the Hindsight Portfolio. Not the index. The flawless portfolio we could have constructed. We lose every time. Recently, it's because lower-quality companies keep outperforming. It's like reasoning with a toddler having the time of its life while you get increasingly upset.

Why Is Lower Quality Outperforming?

Well, the market is rewarding the correction of failure more generously than the continuation of success.

Investors are anticipating successful turnarounds before they have succeeded. As a result, the market's Eye of Sauron is increasingly turning toward complacent boards at low-quality companies. Its burning gaze is a powerful incentive to buck up their ideas or risk being taken over themselves.

The ratio of takeovers to IPOs is unusually high. With fewer new companies to promote, brokers have an incentive to push turnaround and takeover candidates instead. Deals equal dosh. Poorly managed businesses are attracting private equity, playing pass-the-parcel with cash flows. They believe management's greatest achievement may be agreeing to sell the assets. It may well be. Take easyJet. Its aircraft and landing slots may be worth more than the takeover offer. Apparently, the airline is the liability.

So, What Is Quality?

We look at a business and ask a simple question: how would we copy it?

Anyone can try it. Start with your local coffee shop. What would it take to copy it? How might you improve it? Some businesses take a fortnight to copy. Others would take a lifetime.

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