The investment process is a combination of qualitative industry and company competitive position analysis and quantitative financial forecasts and valuations as follows:
Step 1: Stock filtering and coverage
We maintain direct coverage on all stocks within the S&P/ASX 300 Index, as well as a significant number of eligible stocks within our universe that are not included in this index.
Step 2: Financial modelling
Companies are subject to detailed financial analysis using a standardised proprietary company financial model. The model consists of a detailed profit & loss statement, cash flow statement, balance sheet and forecast assumptions. Analysts also have the flexibility to add additional information they believe pertinent to any company. External meetings form an important part of the company assessment.
Step 3: Industry and business quality assessment
An assessment of current and future key industry drivers, the level of industry returns and company specific reasons for relative success within an industry is quantified into financial forecasts, of sustainable margins and returns.
Step 4: Detailed company valuation
Companies within the investment universe are subject to a standardised ‘sum of the parts’ valuation methodology where financial statements are forecast forward three years to reach a mid-cycle or sustainable level of earnings, margins and returns. This determination of the mid-cycle or sustainable level is a function of the industry and business quality assessment.
Step 5: Business and financial risk assessment
We assess the sensitivity of a company’s cash flow to key macro factors such as interest rates together with the impact of financial leverage and capture this information in our database. We believe that these factors are a key risk consideration when constructing a portfolio as opposed to only looking at returns based volatility measures (i.e. tracking error).
Step 6: Portfolio construction
Portfolio construction aims to maximise risk adjusted expected returns, whilst maintaining diversification and skewing the portfolio to high quality companies. Analysts take an active role in the consideration of portfolio inclusions, exclusions and relative weights with final positions the responsibility of the Portfolio Construction Committee.
