Our philosophy is based on two main components, fundamental research and risk management.
Value investing outperforms: We believe that a portfolio of stocks trading at discounts to fundamental value – as measured by sustainable free cash flow yield – will deliver superior investment performance over time.
Excess returns on capital are difficult to sustain: To be sustained, we believe that excess returns on capital need to be supported by favourable industry structure, demonstrable competitive advantage and disciplined management.
Franking credits are valuable: We believe investors should be indifferent between a dollar of cash and a dollar of franking credits. We make investment decisions on this basis.
Markets are mostly efficient: Rarely, in our view, is a stock under or over-valued without good reason. To be a good investment, we need to understand why the stock is mispriced and have an explicit view to the contrary.
Market timing is difficult: We believe that the value of a company is predominantly determined by the shape of the industry and its position in 3 to 5 years’ time.
Our bottom up fundamental research process: (i) utilises projected free cash flow in three years as the key driver of valuation; (ii) tests the sustainability of individual company returns; (iii) recognises the value of franking credits; and, (iv) focuses our efforts on areas where we might have insight or a point of difference relative to market expectations.
We are exposed to behavioural biases and style risk (in short-term): We recognise that value strategies tend to be skewed towards stocks with poor momentum characteristics. We can manage both the behavioural biases and style risk typically associated with value strategies as well as add incremental alpha by overlaying shorter-term, momentum-based hedge strategies.
Derivatives are an attractive way to reduce market exposure: Relative to simply converting a portion of a portfolio into cash, we believe that the use of derivatives to reduce security exposure can effectively reduce turnover, preserve franking credits and defer capital gains tax liabilities.
Our hedging process is focused on (i) identifying circumstances where we are vulnerable to behavioural biases; and, (ii) targeting market exposure levels by using derivatives that align with our clients’ objectives.