Our investment philosophy
We follow an active bottom-up equities investment approach. We aim to invest in quality companies with strong fundamentals using a disciplined proprietary research methodology. The objective of our research is to identify sensibly priced, high quality companies that can deliver sustainable long-term earnings per share growth. We believe selecting companies that display these features is the most important factor in producing consistent, above-average long-term performance with relatively low risk.
Essentially we are looking to buy and hold reasonably priced growth companies with the following attributes:
- very high quality in terms of management, franchise and financials
- sustainable long-term earnings and cash flow per share growth rates, and
- share price valuations which do not already reflect the above.
Our investment process utilises a fundamental, qualitative approach to equity investing, while we also draw on quantitative techniques to supplement our own research. Our qualitative analysis results in our determination of the strength and sustainability of the factors contributing to the company’s growth profile.
How we research and select companies
Our investment approach is heavily research focused. We employ a rigorous bottom-up research process which combines regular company visits with extensive fundamental analysis. Our investment research identifies companies with sustainable long-term earnings per share growth prospects and focuses on those stocks where we believe the market has incorrectly priced future growth potential.
Our investment process utilises a fundamental, qualitative approach to equity investing, while we also draw on quantitative techniques to supplement our own research. The most important part of our process is the qualitative analysis which results in our determination of the strength and sustainability of the factors leading to the company’s growth profile.
Investment ideas
Investment ideas are stimulated by extensive company visits, research trips, industry contacts, ongoing communication between our UK and regional offices in Hong Kong and Singapore, ad-hoc interaction with the global sector analysts, and broker research. The most significant source of ideas and research comes through country and company visits, as well as an extensive network of industry contacts. Broker research may be used as a starting point, but the majority (over 90%) of research is internal and proprietary.
Company meetings
Our portfolio managers and analysts develop in-depth knowledge of companies and countries through frequent research trips to companies in their local region.
We place strong emphasis on high quality proprietary research and direct contact with the companies into which we invest. Over half of our commission is allocated to those broking firms who help us gain access to the senior management of companies in which we are invested, or might invest.
Throughout the year, the team makes direct contact with company management via company visits (research trips to the region and in-house presentations), industry conferences (both in the UK and abroad) and conference calls. The team meets with over 1,000 companies per year. We also have many analyst meetings. These take place with external broker analysts who specialise in emerging market companies.
These company meetings usually take place with senior and operational management and focus on gaining deep knowledge of management quality, franchise strength, balance sheet strength, and the long-term growth strategy. We believe that we glean valuable insight into a company by interviewing management on their sites and premises. We enhance this insight by understanding the company’s industry, competitors, suppliers and customers.
A portfolio manager and/or analyst (sometimes also accompanied by a global sector analyst) would usually attend these meetings.
Qualitative analysis
We focus on quality, growth and price, paying particular attention to the quality of management (eg incentivisation, attitude to risk), the strength of the franchise (eg barriers to entry), the structure of the balance sheet, the long-term growth prospects of the company and the market valuation accorded to the business. We also monitor trends and developments in corporate governance closely, and are active shareholders when appropriate.
Prospective and current investments are closely monitored using a comprehensive balance sheet and cash flow analysis to identify company fundamentals and long-term trends. Through the use of our proprietary company report we look at a number of qualitative factors when researching corporate prospects, such as the focus and integrity of company management, past mistakes and lessons learnt from them, their attitude to risk and treatment of shareholders, barriers to entry such as brand strength, reaction to market forces, the state of the industry, a company’s pricing power and expansion or growth plans.
Quantitative analysis
Additional quantitative research will then assess the company’s financial strength – its liabilities, capital structure, revenues, earnings, expenses, inventory and cash flow. In emerging markets, attention is especially paid to currency activity, the maturity of borrowings and the level of debtors. This helps us determine that the company is fundamentally sound and earnings growth is sustainable.
Watchlist
From this background work we produce a list of ‘best ideas’ which comprises our watchlist. These 350 or so stocks are all of sufficient quality to be included in our portfolio, and also offer sustainable long-term growth prospects.
Portfolio
Before passing into the portfolio from the watchlist, we must be comfortable with the current valuation of the stock. We do not want to overpay for earnings per share growth prospects and expect our investment team to form very clear views as to what each potential investment is worth. There is no point buying companies that are 'priced for perfection'.We believe it is much better to buy companies that are still under-owned and not yet fashionable, where the true potential has yet to be recognised by the market. This process requires a clear statement on both entry price and price review targets for investments. Such discipline ensures that we constantly reassess the basic assumptions that we have made to determine whether they continue to be relevant.
