Investment Methodology
Process Overview
Our investment process is based on i) performing quality macro analysis to identify attractive sectors to overweight; ii) using quantitative screening to prioritize stock research activity; iii) fundamental due diligence to select individual stocks for purchase.
Quantitative Screening
Our objective is to prioritize our research on "good quality" companies that are "attractively valued" where "sentiment is improving" and "investor demand" looks to be outpacing supply.
We use a screening method that ranks by 4 metrics to try to identify such companies:
- Good Quality - measured by reference to a company's past and projected returns on investment (ROI). High ROI can be a strong indicator of a good quality business.
- Attractively Valued - measured by comparing the current market valuation with a valuation derived from a discounted cash flow from existing and future investments.
- Sentiment - measured by analyzing analyst earnings estimates over the short term to gauge changes in market attitude about a given company's prospects.
- Investor Demand - measured through price momentum by taking relative market performance over 3, 6 and 12 months. Different from strict technical analysis, price momentum can indicate market sentiment and helps time purchases and sales.
By ranking companies using these 4 metrics, we can cut through the data glut to prioritize candidates for extended due diligence and research. The process is repeatable and scalable; it can be used across most markets; and, by narrowing and defining the list of candidates for purchase or sale, we can focus our research efforts and structure the due diligence process.
Due Diligence
Our method of due diligence involves appropriate value oriented research and analysis: we test screening input data; we review all manner of traditional metrics; where appropriate we build profit and loss models, balance sheets and cash flow statements for investment candidates and conduct sensitivity analysis. Based on our analysis we generate our own buy and sell ideas with little influence from outside brokers.
The smaller the company, the more likely we are to meet with management. However we are wary of being over-influenced in our valuation assessment by what are inevitably limited face-to-face meetings. We place emphasis on hard quantitative numerical analysis over softer considerations.
Buy Discipline
Stocks are purchased when they score well on more valuation criteria than other candidates for purchase and conviction is strong. There is a bias towards keeping trading activity and turnover as low as practicable.
Sell Discipline
We review stocks that have moved significantly (+/- 20%) over the most recent 3-month time period. In addition, some portfolios are run with portfolio construction rules (for example as concentrated portfolios with equally weighted positions). Here a buy decision will trigger a sell review requirement. For other portfolios, earnings estimates downgrades are the main trigger of a sell review.
