INVESTMENT PRINCIPLES

Quality companies deliver compound returns

We favour companies that have high and improving rates of return over time, healthy margins and superior earnings growth prospects. Having won their way into the portfolio, companies must earn their right to remain in the portfolio.

Good quality management is imperative

By this we mean people we can trust, who have a good track record of managing businesses and of maximising shareholder value and treating all stakeholders fairly. We look for management teams where the individuals have a significant proportion of their personal wealth invested in the business. Growth oriented, proactive and innovative leadership backed up by operational efficiency and strong systems and controls are some of the hallmarks for success.

Easy to understand structures and sound business models

We seek out companies with strong, prudent and easy to understand balance sheets and business models that are consistent generators of free cash flow. We like focused businesses that add value and have strong brands or have identifiable competitive advantages.

We are owners of companies rather than buyers of stocks

We see ourselves as owners of companies rather than buyers of stocks. We invest for the long-term and disregard short-term market noise. Our portfolio turnover is typically less than 20% each year.

We identify the investment opportunity in trends

We are fully aware of the headwinds or tailwinds that stocks can encounter from structural changes within the world. We focus on companies that are well positioned to benefit from enduring trends which provide them with earnings impetus independent of other economic variables. This can be a powerful risk mitigator.

Positive earnings revisions

Earnings expectations are an important driver of share prices. As a result we believe it is important to be alert to changing earnings expectations. Behavioural investment research reveals that analysts tend to under-react to new information, leading to trends of upward or downward earnings revisions. We seek investment opportunities in companies that are seeing upward revisions to expectations for profitability, in anticipation that this positive trend will continue.

Valuation is important

Buying at the wrong price is destructive, even with good quality, fast growth companies. We aim to buy companies that are trading at, or below, the value we perceive in their fundamental economic prospects.

Sell discipline is critical

Experience has taught us that it is often easier to detect the improvements in a company which prompt a buy, than the subtle deterioration which should lead to a sell. We overcome these difficulties by having clear views on what we expect the company to achieve, an explicit understanding of the particular business risks it faces, and constant reviews to ensure that the investment case is still intact. Valuation concerns typically motivate us to reduce positions while fundamental concerns result in complete sales. We review positions if a company fails to meet its targets, or underperforms persistently. We would rather sell and be sorry than risk crowding out other opportunities by holding substandard investments in our portfolios. When we have picked a winner, we remain alert to valuation and reduce the size of our stake as the market rerates the share to more accurately reflect the true value of the company.

Extremely mindful of risk, aware of benchmarks

Risk has many guises and goes far beyond portfolio constraints, or deviating from benchmarks. To us, risk includes investing in poorly managed companies that do not deliver, or over-paying for a good company, or alternatively, in overlooking potential. If we don’t like a company, we don’t invest in it. Equally importantly, we actively seek to recognise the blue chips of tomorrow before their promise is priced in by the market. We diversify risk by constructing a portfolio that invests in quality companies in many different industries, rather than trying to dilute risk by simply buying more stocks. Thus our focus is on taking intelligent risks, fully understanding the unique risks each opportunity presents, and using this knowledge to generate long-term efficient returns for our clients.

A trend is your friend

Adages such as ‘never catch a falling knife’ or ‘the trend is your friend’ abound in investment circles for good reason. It is evident from empirical research that it is better to follow an already established trend than try to anticipate a turning point. We look to technical research and relative performance charts for confirmation of our investment decisions.

Quality pays dividends

We are cognisant that many of our clients rely on dividend income and require a growing stream of dividend income to keep up with inflation. Achieving a consistent overall dividend flow with a clear growth trajectory is part of our portfolio management service.