The fund managers evaluate companies in the UK stock market for their possession of durable Economic Advantage. Companies must possess at least one of the main advantages: intellectual property, strong distribution or recurring business (at least 70% of annual turnover).
The fund managers measure the universe of Economic Advantage companies for the market’s appreciation of their potential earnings growth. Under-appreciated companies have the strongest potential for share price growth. Companies can be under-appreciated on three different measures: surprising earnings growth, under-estimation of future recovery in earnings and re-rating of highly profitable companies.
Every smaller company held in the Economic Advantage funds has at least 3% of its equity held by main board directors. Companies are also assessed for employee ownership below the board and changes in equity ownership are monitored.