Investment Process

Generating Investment Ideas

The Investment Manager identifies potential investment opportunities in many ways including:

• Quantitative screening of data for attributes which suggest a particular stock is underpriced;

• Reviewing ASX announcements;

• Monitoring news sources, publications and broker research;

• Networking with fellow members of the investment community; and

• Attending conferences, teleconferences, webinars and events.

Monitoring

Once a particular Security is identified as a potential investment opportunity it is included on the Manager’s core watchlist. This watchlist is dynamic. Some Securities may be on the core watchlist for a long period of time but never progress to inclusion in the Portfolio (for example if the relevant company carries on a good business but never becomes cheap enough in the Manager’s opinion to purchase). Other Securities may only briefly be included on the watchlist before being removed (because they become too expensive before further work is done on them, for example).

This watchlist forms the basis of our immediate investment opportunity set. It is the base from which we conduct further investment analysis.

Fundamental Research and Modelling

In-depth analysis is conducted on those Securities highlighted through the above processes as apparent investment opportunities with attractive upside at an acceptable degree of risk.

This analysis involves weighing up the quantitative and qualitative aspects of a particular Security including:

• The industry in which the company operates, and its competitive advantages and their sustainability;

• Growth prospects for the company, for both revenue and the deployment of new capital;

• The capability of the company’s management, and its alignment with minority owners;

• Strategic options at the company’s disposal;

• Returns on capital (historic and especially prospective);

• Cash flow generation, at both the operating and free cash flow levels;

• Financial strength.

 The foregoing establishes the quality of the relevant company. We compare that with its price, typically expressed as a multiple of its earnings, which we forecast. By definition, value (V) is a function of quality (Q) and price (P) i.e. V = Q/P. By systematically assessing quality and price, we derive a stock value ranking which drives the stock selection process.

Contact

As part of the investment process, we seek to form a considered view of the relevant company’s business, its management, and the industry it operates in. This can entail reading annual reports (including the remuneration report), face-to-face meetings, phone meetings, visiting facilities, talking with competitors and customers, and seeking insights from our network of fellow investors.

Portfolio Construction

Based on the value ranking identified above, Securities are selected for the Portfolio. The percentage or weight assigned to each Security is dependent on its value (for example, its degree of under-pricing), and its perceived riskiness (which is based purely on the Manager’s judgment).

In most instances, there is a maximum 10% weight for any one Security in the Portfolio.

Stock and industry correlations are taken into account to ensure diversification of the Portfolio.