Investment Philosophy
In simple terms, our approach is one of “bottom-up” stock picking with a focus on fundamental, often proprietary, research and frequent meetings with company management. Below we describe in more detail the central tenets of our investment philosophy:
Holding the best assets for the long term
We firmly and increasingly believe that the best way to create wealth is to hold the best assets for the long term. We strive to build an enduring collection of companies which combine excellent economic characteristics with outstanding management. By “excellent economic characteristics” we typically mean: above average growth; pricing power; recurring revenue; strong balance sheets; low capital intensity. Many of the best companies also invest counter cyclically, thus accelerating market share gains in a downturn. As our approach is largely “bottom-up”, we do not invest in companies whose business models we cannot understand and whose potential success is overly dependent on macro factors or affected by regulatory interference.
In-depth fundamental research
We strive to understand the companies we invest in better than any non-insider. This means doing the hard work to develop an “information edge” over the rest of the market. This often leads to a contrarian view.
Team approach to ensure a rounded view on investments
Our multi-disciplinary team includes substantial experience in equity research, interrogation techniques, forensic accountancy, investigative journalism, and market research. This enables us to take a more rounded view, and helps us to build an information edge. Our internal market research team speaks a total of twelve languages, enabling us to collect proprietary information globally, including all of BRIC.
Long bias, with market hedging
Our aim is to beat the market when it goes up and have a lower drawdown when it goes down. We have a long bias as we believe the stock market will trend up over time and do not try to protect small market moves. Instead we often use put spreads as a market hedging overlay.
At any time the fund’s exposure is determined through bottom-up stock picking: the more good ideas we have the higher the exposure. There are only limited circumstances under which we would run a net leveraged portfolio. Since launch our average net exposure has been approximately 75% (60% on a beta adjusted basis) and as at February 2010 we have outperformed the market by a compound of 10% per annum, with lower than market volatility.
On top of this stock-picking approach we apply a macro overlay consisting of external and internal surveys of current economic and near-time future indicators. We do not believe in predictions about long-term macro developments.
Ignoring market “noise”
We do not use sell-side analysts (in practice this means no Bloomberg/Reuters on our screens and no voicemail), which cuts out the market noise and affords us the time to do more in-depth fundamental research. It enables us to adopt a more disciplined approach, and not attempt to trade on the back of short-term fluctuations in price.
Getting close to company management
We believe that our understanding of companies is significantly improved by holding regular, in-depth one-to-one meetings with company management. We are lucky to be associated with some of the very best managers, both in terms of ability but also integrity. The management of our current portfolio companies have, we believe, always been candid and honourable in dealing with us and this is crucial to our investment process which relies heavily on frequent, high quality meetings. We do not believe in opposing management; in fact we aim for long term co-operation, and often share the findings of our proprietary market research.