When we select equities for our funds, we follow a rigorous five-step process. We believe that this approach to stock picking has the potential to deliver consistent long-term returns.
When we select equities for our funds, we follow a rigorous five-step process. We believe that this approach to stock picking has the potential to deliver consistent long-term returns.
Business – Is there a competitive advantage? What’s the company’s track record in delivering return on invested capital? Can they continue to grow?
Management – Are managers’ incentives aligned with that of the shareholders? Do they have a long term view and focus on return on invested capital? Is there a long runway and limited risk of a major competitor coming into the market?
Valuation – Are we purchasing this company at a discount to its long term value (intrinsic value) and getting an acceptable margin of safety?
We use discounted cash flow analysis; and normalized earnings power for commodity based companies. We also look at relative multiples, such as price to earnings and price to book value.
Fundamental Analysis - Step four is discussion and debate around our fundamental analysis among the team members (portfolio managers and analysts). After completing our fundamental analysis, we will invest in a company, put it on a watch list, or consider a company not investable.
Portfolio Construction - Portfolio construction relates to managing the overall characteristics of the portfolio. If a new company does make it in the portfolio, we will more likely remove another company, as we want to maintain concentrated portfolios. Throughout the process we aim for well diversified portfolios to mitigate downside risks. Our mandates will typically hold 40-50 stocks.