Construct Concentrated Client Portfolios

We now select around 35 shares for our client portfolios.  We take the following steps to ensure our client portfolios are optimally positioned to capture excess return-generating opportunities within a risk-managed context.

Step 1:

Start with the universe of ±110 shares, which we have a strong positive bias towards the high quality shares list as the base to select shares to be held in the fund. 

Step 2:

Analyse the level of company earnings and stress-test the margin of safety in valuations for all shares. Compare valuations using methodologies such as DCF, P/E, Yield, Price/Book and Sum of the parts. "Checklist" for shares not on preferred list. 

Step 3:

Understand the level of conviction we have in our various valuation methodologies for all the shares we analyse. We do not buy any share if we do not have an above average level of conviction in the margin of safety of the share. 

Step 4:

Analyse and understand the diversification characteristics of all the shares we analyse. We believe that ±35 shares in a fund is adequate, efficient and most appropriate for meeting fund diversification needs for SA equity funds. 

Step 5:

Understand the inter-relationship of shares in the fund. For shares with similar earnings drivers, we prefer to own shares that are more cheaply priced relative to their valuations. Example: Banks vs Retailers, where SA interest rates are the key driver of profitability in both sectors.

Step 6:

Analyse the shares in the fund on research systems for a deeper and more quantitative understanding of the inter-relationship, decomposition of risk and volatility characteristics of the fund holdings.

Step 7:

As a final portfolio construction measure, we ensure that the positions in the fund reflect our views and incorporate an understanding of company sensitivity, liquidity and market leadership. We also ensure that these positions meet our portfolio diversification objectives, mandate requirements, excess return targets and risk controls

Download our Process Document