Before a company can be included in our portfolio it must meet the criteria set out in our research and screening process.
This process consists of four central stages. They include:
1. Initial screen
Of the approximately 1,500 companies listed on the Australian Securities Exchange (ASX), we exclude listed investment companies, listed property trusts and overseas stocks listed in Australia (with the exception of NZ stocks). This initial screen reduces our investible universe to between approximately 500 and 600 companies.
2. Idea generation
The second component of our research is our 'idea generation'. This is conducted through our relationships within the industry. We have day-to-day contact with business and industry contacts, company management and directors, industry participants (such as competitors - both listed and unlisted), vendors, customers and suppliers. We typically aim to identify between 80 and 120 strong company prospects that warrant further research and analysis.
3. In-depth fundamental analysis
Regular company visits and in-depth proprietary research to identify companies that meet our investment criteria is essential to our investment process. We aim to have 300 company visits or meetings each year, along with regular stock broker meetings and conferences which further aid our research.
If, after a company visit we believe an idea has potential for inclusion in the portfolio and the company is trading below its fair value, a more detailed analysis is performed on the company, covering both the qualitative and quantitative aspects of the company. This is a structured process that aims to thoroughly assess a wide range of company and industry-specific factors, which are subsequently scored. This process also includes those companies already held in the portfolio, which are subject to ongoing analysis.
We apply a detailed qualitative screen to review the quality of each business franchise. Companies are analysed further using a quantitative screen to assess the financial strength of the company. We aim to screen out companies with:
- Unacceptable liquidity
- Poor management, and
- Unsustainable earnings and asset or balance sheet risks.
Each company considered for inclusion in our portfolio receives a score based on both their qualitative and quantitative factors. The results of our analysis allows us to determine whether a share price is trading at a significant discount, or premium, to our assessment of fundamental value.
4. Portfolio construction
With a focus on bottom-up stock selection, our smaller companies portfolio will typically hold between 25 and 45 companies. In determining the individual weightings in our portfolio we will consider the score derived from our own ranking, the liquidity of the company's shares and the diversification impact on the portfolio.