What is your investment style?
Our approach is value oriented, but not in the sense of buying low PE, high dividend yield companies (only). We view value as relative to an intrinsic valuation that we estimate. We, thus, might invest from time to time in growth stocks that might be trading on high multiples.
We are also catalyst driven. We believe that eventually stocks will trade around their intrinsic value, but we favour the ones for which we identify a certain number of changes in their internal or external environment that happened or about to happen. These inflection points are usually the engine for long term outperformance
We tend to hold a very limited number of stocks (less than 30). We believe too many stocks/strategies tend to dilute superior returns and decrease the focus of the team. While risk is slightly higher with concentrated portfolios, most of the diversification benefits are achieved by holding 15 to 20 names/strategies
We do not select companies solely based on the economy: we do not have a competitive advantage on that front. We believe that our investment approach yields superior returns over the whole economic cycle but might underperform in the short term due to cyclical factors.
What is your investment process?
Our investment process is research intensive and bottom-up oriented, as opposed to top-down approaches based on economic analysis. The universe of more than 1000 companies is split in sectors, and each of the team members is the leader on his assigned sectors and is responsible for analysing the companies and monitoring the news and development in that sector.
We also use quantitative techniques and proprietary models to identify undervalued companies. We base our research on best of the art databases and we use proprietary models to quickly assess opportunities.
Typically, once a company is identified as a candidate for investment, we produce a short report on the investment case (ICR) and the “back of the envelope” calculations that make this an attractive target. We then work on modelling the company and spend some time (1 to 2 weeks) to understand more in depth the sector drivers and the company’s fundamentals. The 3rd phase consists in conducting a very thorough analysis by meeting the company’s management, industry specialist, suppliers etc … We might hire consultants or other service providers to help us on this step and this analysis might take as many as 4 weeks.
On a case by case basis, and depending on the opportunity, we might start investing as soon as the 1st investment case report is issued and increase our position in time and as we learn more about the company.
While ideas often, but not solely, emanate from sector specialist, the whole team participates in the investment assessment and in due diligence to challenge the sector specialist in his assumptions and approach. The relatively small size of the team allows for a complete sharing of ideas and analyses as well as real debates on the assessment of investment opportunities.
What do you look for when you analyse companies?
Because we are value oriented, we 1st look for companies that trade at large discount to intrinsic value. This intrinsic value is our estimation based on our assessment of the company environment and fundamentals.
But we also look for “inflection points” or changes in the internal or external environment of the company. These might have happened recently or we anticipate happening. In certain cases where the changes are endogenous, we might even seek to interact with management to assess the willingness to make those changes or the probability of those changes happening.
These inflection points might be of various types. They can be internal, e.g. management change, M&A, restructuring, change in business model etc … They can be industry related as for example a change in competitive landscape or in regulatory environment… or they can be market driven as for example recognising growth (or the lack of it) and changing valuation methodologies used by the market .
How do you construct a portfolio from investment candidates?
We believe that significant performance will come from specific holdings that will surprise on the upside. We thus tend to concentrate our portfolio around a limited number of stocks.
We determine the weight based on our conviction and on what level of due diligence we are at. We typically implement three types of weightings
2% : (typically 1% to 3%) these are stock that were identified as attractive, for which we did our initial due diligence (Investment Case Report) and we consider the timing appropriate to start building a position while conducting deeper analysis
5% : (typically 3% to 7%) stocks for which we conducted thorough analysis that confirmed our initial opportunity assessment and that are candidates for larger positions upon in-depth analysis
10%: (typically 7% to 20%) stocks for which we conducted an in-depth research, we typically have interacted with the management, met consultants, suppliers and/or customers and for which we have a very good degree of comfort that value will be unlocked.
The number of core positions (10% weightings) is very limited, typically less than 5. We also tend to keep the total weight of core positions and intermediate ones (i.e. 5% type) to less than 80% in aggregate.
We also look at the overall risk limits we have imposed on the portfolio (VaR, Stress Tests and liquidity) to make sure we are comfortably below them, and amend the portfolio if not.
Regarding sector weightings, we usually do not consider any index as a reference but we tend to have many different sectors materially represented (expect at least 5 out of the 10 ICB sectors).
We believe such approach to portfolio construction is in line with our investment philosophy and allows capturing the value added of our investment process while benefitting, to a certain extent, from diversification. Using computer model to design the portfolio has at least two flaws : the models are usually unstable (variance matrices in illiquid frontier markets …) and they usually require as an input expected returns which is difficult to assess (mainly for timing issues)
How do you manage risk?
First, our investment approach inherently involves some loss protection as we invest in undervalued stocks trading at significant discount to fair value.
We also set VaR, Stress Test and Liquidity limits
Weekly, 95% VaR less than 10% of the portfolio
Stress Test Loss should not exceed 20% of portfolio
We should be able to sell at least 50% of the portfolio in 5 days (based on 20% of Average Daily Volume)
The fund is structurally long equities and thus will be exposed to high risk (inherent to any equity investment). In our case we continuously monitor market and economic environment, globally and regionally, to assess systemic risk and avoid large drawdown. We are much more focused on not losing money rather than underperforming any given index.
What has been the risk experience of the fund?
Our investment approach usually results in the fund having a beta often less that one. The fund has also experienced lower losses in adverse circumstances.