INVESTMENT PROCESS

Asset allocation

The allocation of funds between different asset classes is one of our key responsibilities as an investment manager. Even subtle adjustments to these allocations as events in world markets alter expectations of future returns can add significant value.

Our asset allocation process is top-down and forecast driven. Our investment universe spans the full ambit of securities, including local and offshore equities, fixed income, money market and property. We perform our own disciplined research across markets and economies, supported by third party analysis, and incorporate quantitative and qualitative methodologies. Before making asset allocation decisions we formulate our own views on economic growth, interest rates, yield curves and currencies, from which we are able to make adjustments to bottom-up profit estimates such as we consider reasonable to reflect our macro views. This then enables us to set equity index targets and expected returns per asset class.

In support of asset allocation decisions we generate:

• economic, interest rate, yield curve and currency estimates;
• adjusted bottom up profit estimates, to reflect our economic forecasts;
• “fair” equity market price-to-earnings multiples using our adjusted profit estimates;
• equity index targets and expected returns;
• bond and currency returns.

Stock selection

Our stock picking seeks to add value through a disciplined, transparent process run by a team of focused and experienced professionals. Our approach is both intuitive and pragmatic. We start by casting our net wide, with broad research across regions, industries and companies to develop an understanding of key trends and themes. Promising ideas are followed through with detailed fundamental analysis, both at a company and sectoral level. Our job is never done, we constantly challenge our views and reassess our investments.

We monitor an extensive universe of some 100 companies which includes existing blue chips and smaller companies which we believe have the potential to develop into such. The companies which in our view offer superior risk-adjusted returns on the basis of forecast earnings and valuations are selected for our portfolios. Contact with corporate management and leading industry players, the use of multiple forms of research from leading investment houses, and a disciplined approach in our in-house research are important tools of our trade. Our conversations with management teams typically focus on their long-term strategic vision. As partners in their business, we like to know how they think about their key opportunities and threats. This provides us with insight into long term industry dynamics and sometimes changing trends across companies, industries and even sectors.

The importance of themes

We believe investment returns can be considerably enhanced by early identification of powerful changes in the long-term structural growth drivers of the world economy. Companies that have a sustainable ability to monetise such trends offer superior earnings growth prospects, which are often not yet fully reflected in the share price. This is particularly significant in today’s information age. The world is undergoing the most rapid pace of change experienced since the industrial revolution as we switch from traditional industry to digitized information. This enables new opportunities and demand for some products and services but is capable of rendering others obsolete.

Our team’s geographical diversity assists us in identifying structural, durable forces of change that can drive new avenues of sustainable growth for some companies, or threaten the status quo for others. We then supplement any available industry research with our own fundamental research to identify the companies best placed to capitalise on these investment themes. Typically, these trends create tailwinds which become evident in activity growth rates ahead of the general economy and/or pricing power, resulting in increasing margins and returns on equity. The presence of a growth driver independent of other prevailing market conditions provides an element of risk mitigation.

Risk management

We value the trust our clients place in us in allowing us to be stewards of their hard-earned capital and champions of their future aspirations. Eau Rouge aims for consistent and superior performance over the longer term, without taking risk that is not commensurate with expected returns. We acknowledge however that investment risk is a precondition of active management – risk and performance are inextricably linked. Our job is to understand and manage risk by understanding the unique risks attached to each investment opportunity. We think of it as taking intelligent risks.

We regularly monitor the deviations between our portfolios and industry accepted benchmarks and examine how individual positions combine to make up the overall portfolio risk. This depends on the correlations between different securities and their response to common geographic, currency and sector factors. However we take our assessment of risk much further. We believe the main element of managing investment risk in portfolios is to analyse carefully the characteristics of the companies in which we invest. While many may manage risk by reference to a safety zone around a benchmark, we see risk in being invested in a poor quality company, or in overpaying for a good one. We resist the industry-wide trend towards peer group benchmarking as we believe it has forced fund managers, as an industry, to focus more on delivering competitive short-term performance than on the underlying objectives of the client.

Portfolio management

Our portfolio management style is both disciplined and pragmatic. We are highly disciplined in applying investment decisions uniformly across segregated portfolios to ensure coherence and consistency yet pragmatic in order to accommodate specific client needs and diverse tax regimes.