The Guinness Investment Process
Our investment process has been developed to allow our fund managers to make investment decisions that are independent, efficient and high conviction. We apply intelligent screening tools which enable us to:
- identify anomalies and value opportunities in the market that other investors haven’t yet noticed;
- control the impact of emotion or sentiment-driven investing in our portfolios;
- prioritise our fundamental research by narrowing and defining the list of candidates for potential purchase or sale, while screening out the impact of short-term noise;
- and deliver clear and simple portfolios that we believe will achieve superior returns in the long term.
Our screening process is designed to deliver a pool of potential value investments with good growth potential.
When it comes to assessing stocks for purchase or sale, our starting point for each fund is to screen all stocks in its investment universe against four fundamental criteria that encapsulate both long-term and short-term drivers of share prices.
|1. Quality||Measured by reference to a company’s past and projected cash flow and accounting returns on investment. The higher the average returns, the better the company.|
|2. Value||Measured by comparing the current market valuation with a valuation derived from a discounted cash flow from existing and future investments.|
|3. Earnings forecasts||Analysed over the short term to gauge changes in market attitude to a company’s prospects.|
|4. Price momentum||Measures 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 four criteria, we can sift through the data to prioritise candidates for extended due diligence, testing and research. The process is unbiased, repeatable and scalable; and by narrowing and defining the list of candidates for purchase or sale, we can focus our detailed stock research efforts where it is most warranted. In addition, for some funds we apply further specific criteria to prioritise companies with selected characteristics. For example, our equity income funds only buy companies with persistently high returns on investment.
Investment decisions driven by internal research
Having efficiently identified potential candidates for purchase or sale, our detailed analysis begins. We subject the output of the screening process to a sense check, which ensures that the raw output represents a true and fair view of reality. We then build profit and loss models, balance sheets, and cash flow statements as appropriate for each investment candidate. This concentrated process allows for a ‘nuts and bolts’ analysis of the key financials, and highlights where opportunities and risks may lie.
While we take opportunities to meet with company management for our sector specialist funds, it is not at the core of our process as it is with some managers. Our research and analysis is predominantly numbers-driven. We spend significant time considering the macro drivers for each fund. We attend relevant industry and investment conferences throughout the year. We also make use of broker research for macro data and information that we use to form our sector outlook.
Based on what we learn first-hand we generate buy and sell ideas internally. We can act upon them quickly, with fund managers empowered to make all investment decisions.
Constructing our portfolios
We invest with conviction for the long term: all our funds are run as concentrated portfolios, without benchmark constraints, with a value bias, low turnover and strong sell discipline.