Philosophy
The Colonial First State Australian Equities - Core philosophy is based on the belief that successful active management in the Australian equities sector can be achieved via:
- an understanding of how and why investment markets are inefficient and consequently present 'mispriced' investment opportunities (inefficiencies) that are both identifiable and exploitable
- thorough, and broadly sourced research at the company, industry and thematic levels, aided significantly by advantages arising from being able to access intelligence within the CBA network
- an innovative and practical approach to the development and use of technology to aid portfolio management and the research capability
- integration of stock selection and portfolio management with the management of investment risk (risk management is integral to all steps of our investment process)
- a disciplined and robust investment process able to add value consistently, and
- genuine skill and a collegiate culture within an experienced investment team.
Objective The performance and risk objectives of Colonial First State Wholesale Australian Share Fund – Core are to outperform the S&P/ASX 200 Accumulation index by 3% per annum (before fees) over rolling three-year periods, with a target tracking error of 3% per annum.
The Core team’s portfolio construction process allows them to quantitatively tailor the risk/return requirements to each client's objectives.
Style The Core investment process has no persistent style bias, aiming to outperform in all market conditions. Disciplined and risk-aware portfolio construction is a key feature of the team’s style.
Investment process Driving our entire process, from our research and analysis to company selection and portfolio construction, is the search for companies that have been mispriced by the market. We look to identify the key drivers of the performance of the share price of each company by employing thematic/industry analysis as well as company research. To understand and compare the market's expectations for these same drivers we utilise both an internally developed database and various company and management screens. We believe our long-term outperformance results from ‘knowing what the market knows’ (ie understanding what information the major market participants have already built into the current price) and applying the results of our detailed analysis against this to identify mispriced investment opportunities
Driving our entire process, from our research and analysis to company selection and portfolio construction, is the search for companies that have been mispriced by the market. We look to identify the key drivers of the performance of the share price of each company by employing thematic/industry analysis as well as company research. To understand and compare the market's expectations for these same drivers we utilise both an internally developed database and various company and management screens. We believe our long-term outperformance results from ‘knowing what the market knows’ (ie understanding what information the major market participants have already built into the current price) and applying the results of our detailed analysis against this to identify mispriced investment opportunities
Step 1: 'Know what the market knows'
Securities Statistics Database: When looking for companies that have been mispriced, we start by considering the market's expectations. We have developed a proprietary database that allows us to determine what the market knows or expects - what is 'priced-in'. This database, the Securities Statistics Database, is updated weekly from each member of our panel brokers – around 380,000 data pieces in total, all reported on a consistent definitional basis.
The Securities Statistics Database provides us with a range of market views on valuation, earnings forecasts and other financial indicators. We use this database and screening tool to gain an information advantage over the market by comparing our own views on certain companies or trends with the market consensus.
Step 2: Stock analysis
The stock analysis process is focused on evaluating each company against five key investment selection criteria. The five key criteria are:
Management 'uality: The primary source of company level research is our program of company visits, which number more than 2,000 per year. Information gained from company meetings is supplemented by other research so that we attain a level of comfort and confidence in the skills and motivations of management, enabling us to complete our assessment of the likely performance outcome of management's strategies. In effect this is a management screen which focuses on both qualitative and quantitative factors.
Industry position: The company is assessed for its sensitivity to key drivers. This research includes an analysis of the industry in which the company participates, as well as analysis of the company’s competitors to assess its relative standing in that industry. Structural changes occurring within that industry are also assessed. A significant effort is made to meet with participants in the 'unlisted' sector, to obtain information and views from non-listed companies and other 'unlisted' participants.
Market factors: Analysis of market factors must be completed to assess the appropriate timing for implementation of share buying and selling decisions. Examples of factors considered are overall liquidity, anticipated investment flows, index weighting or representation changes, corporate actions and any anticipated changes in a company's share register.
Financials: A review of the company’s financial position is undertaken and assessed against its competitors and other comparable companies using factors including cash flow, operating margins, profitability, gearing levels, interest cover, dividend yield, tax rates, etc.
Valuation: Fair value is assessed by triangulating a number of valuation techniques – those most pertinent to the company - including the P/E Ratio, EBIT and EBITDA multiples, PEG ratio, yield and premium/discount to NTA, enterprise value and NPV.
Step 3: Stock selection
Once a company has been assessed by an analyst, the analyst recommends a 'tier' (portfolio weight) position for the stock relative to its index weight. Then the portfolio managers, in discussion with the relevant analyst and the team, assign a portfolio 'tier' (weight) position for the portfolio called the 'team tier'. This is done after the relative merits of the company have been debated, in the context of the stock’s position within a diversified portfolio. For this reason the tier decision of the portfolio managers will sometimes differ from the tier suggested by the analyst.
Step 4: Portfolio construction
The aim of portfolio construction is to align the risk/return profile of a stock and the recommendation from an analyst with an appropriate active position within the portfolio. We have implemented a stock selection and portfolio construction decision process to deliver this alignment resulting in portfolios being constructed within strict risk control parameters.
