Unconstrained Share selection
Using our qualitative investment and risk criteria, we narrow down the shares actively researched by the team to a preferred share list of high quality listed companies. Shares with the following characteristics define what we call high quality companies:
- Sustainable Return on Capital > Cost of Capital
- Quality business models, including a Porter's Five Forces "moat"
- Forecastability of long-term business profitability
- Strong Cash Flows post working capital and maintenance capex
- Proven management with aligned incentives and strong capital allocation skills
- Appropriate margin of safety in their fundamental valuations.
Our funds should both qualitatively and quantitatively reflect our strong positive bias to investing in quality companies and attractive valuations.
However, as we always aim to buy shares at prices that are low compared to their long-term investment valuations, a key part of long-term equity returns lies in the price you pay when buying shares. At times when many quality shares are overpriced or exceptional valuations exists elsewhere, we will invest up to 20% of our portfolios in companies with attractive valuations that do not meet all of the defined criteria for high quality companies.
This step involves stress-testing all our company valuations and sensitivities, and engaging in rigorous debates within our team to decide which shares make it onto our preferred share list. The end result is a more concentrated preferred share list of quality shares from which we can now construct our client portfolios.