There are 3 key steps in our process:
1. Universe Screening
This step is to screen out companies with unacceptably high financial risk (measured by leverage ratios), poor liquidity or too small a market capitalisation. This reduces the number of stocks to around 300.
There are two parts to our research approach – Proprietary Research and Financial Analysis. These help answer the 5 key questions we ask of every company we assess. More information on this is outlined in the Investment Research section. The two parts of research are:
- Proprietary Research: We start with our visitation program, which is a critical piece in our process. Our expectation is that we will visit all screened companies, with increasing frequency where we have real interest and more intense again should we include them in the portfolio. Additionally, we meet with industry groups, competitors and where we can, clients of the company in question. These visits drive:
- Our assessment of the company strategy, and management’s ability to successfully execute this strategy.
- Our inputs into the financial analysis of the company (together with publicly available info); and
- How management address ESG factors in order to reduce long term risks and protect the interests of shareholders.
- Financial Analysis: In this, we take our proprietary research and use this to model the future earnings, cashflow and balance sheet of the company. Our modelling capture the previous 3 years financials (where available), and forecasts out 3 years forward.
The financial models and research summary is in a consistent format, allowing ease of comparison and peer review.
This work provides the basis for the company valuation.
3. Portfolio Construction
The process by which a stock is included in the portfolio occurs in two steps:
- Investment Approval: This is where formal peer review is undertaken of stocks considered attractive and worthy of inclusion in the portfolio. Full models and company research are presented to the Team for discussion and debate. This is in the form of the Company Research Report, which incorporates the financial analysis plus the qualitative work undertaken at the Proprietary research stage. The Team will review this work, the key assumptions and investment case of the stock. Stocks will either be approved, more information or work required before approval, or rejected. Both Portfolio Managers must approve a stock for it to be included in a portfolio. This ensures robust debate and we feel leads to better investment decisions.
- Portfolio construction: Once a stock has been approved for inclusion, the position at which it is added is primarily driven by ranking the Assessed Company Valuation Report (ACVR) of the stock (relative to its current share price) against all other stocks under coverage. This is a rank of a company’s forecast capital growth (i.e the gap between our valuation and the current share price) and the expected dividend yield.
The portfolio is populated by our highest conviction ideas (i.e. approved stocks weighted towards the top of the table), overlaid by portfolio risk considerations, market conditions and portfolio guidelines. The result is a portfolio of companies in which we have the highest conviction.