For more than a decade, the market tended to define quality companies in narrow terms: asset-light businesses with high margins, recurring subscription revenue and little need for capital. Software-as-a-service (SaaS) companies were the purest expression of this idea. Earlier this year, however, that assumption was tested. As increasingly capable AI tools raised the prospect that parts of the software stack could be written, replicated or replaced much more cheaply, the so-called “SaaSpocalypse” wiped more than $1 trillion from software stocks in less than a month.
Where a company’s competitive advantage rests primarily on code, the low capital requirements and scalability that make the business attractive can also make it easier for new competitors to enter the market. If AI materially reduces the cost of recreating a product’s functionality, the competitive moat protecting that business may prove shallower than it looked. Markets have taken note. Capital-intensive businesses have re-rated meaningfully, while many asset-light businesses have come under pressure, narrowing a gap that had persisted for much of the past fifteen years. In effect, the market is reassessing what qualifies as quality.
As a quality-focused manager, we have always taken a broader view of quality: durable advantages that are difficult to disrupt, not simply a light balance sheet. Physical assets that are strategic, scarce and hard to replicate cannot be prompted into existence. The best of these businesses are not threatened by AI. Instead, they are using it to become more efficient.
Waste Management Inc. is a good example. North America’s leading waste business owns a network of landfills, transfer stations and recycling facilities that would be extraordinarily difficult to reproduce – securing permits for a new landfill alone can take many years. That scarcity underpins pricing power and dependable cash flows. At the same time, the company is deploying AI across its operations, from route optimisation to increasingly automated recycling plants. AI does not replace a landfill; it makes running one more profitable.
Air Liquide offers a similar combination, and South Africans need look no further than Secunda to see it. The group operates the world’s largest oxygen-production site there, supplying Sasol’s operations. Infrastructure of this scale takes years to build, and when combined with long-term contracts and strategic partnerships, creates a formidable moat. Meanwhile, AI is creating an additional source of demand: semiconductor fabrication, particularly next-generation memory chips, requires ever-greater quantities of ultra-high-purity gases.
What unites these businesses is that they do not need to predict the winner of the AI race. Whether one model dominates or many coexist, chips will need gases and cities will need their waste collected. And as they use AI to lower costs and sharpen their operations, their growth profiles are becoming increasingly attractive.
Companies of this kind form the foundation of our offshore equity portfolios: great businesses with durable physical advantages, strong balance sheets and reliable, growing dividends. In a period of rapid technological change, true quality is not defined by how asset-light a business is, but by the durability of what protects its earnings and cash flows. Businesses with moats that are genuinely hard to breach are well positioned to keep compounding earnings and dividends for years to come, regardless of how the AI race unfolds.
These securities can be accessed via our International Share Portfolios and unit trusts.
