The Global Equity team seeks to generate idiosyncratic alpha through an investment process with three key elements:
- Collaborative Idea Generation: each member of the team has a research responsibility covering an industry sector of the global economy or structural economic trends. This division of labour underpins the collaborative original research and peer challenge required for the flowing generation of idiosyncratic investment ideas.
- Culture of Conviction: to enable idiosyncratic ideas to drive investment returns, they must be given sufficient weight in portfolios and sufficient time to work, which is shown by the number of stocks held and the average stock holding period.
- “Three Silo” Portfolio Construction: the funds are balanced with respect to popular investment styles, such as value and growth, to ensure that ideas and idiosyncratic alpha drive returns. The portfolios comprise three silos of stocks. These silos have low correlations with one another and when combined provide diversification to mitigate against the transitory fortunes of investment styles.
This philosophy and process is implemented through the following four-step workflow:
i)Stock Idea Generation: stock ideas are generated by combining the team’s collaborative global research focused on industry and economic trends with the quantitative screening of company fundamentals, including revenue growth, profitability and cash flows. This combined top-down and bottom-up approach to idea generation helps identify excellent companies that are positively exposed to powerful trends.
ii)Stock Selection: the resultant stock ideas are subjected to an in-depth evaluation of value creation opportunity, corporate strategy and management quality. This involves building financial models and meeting company management. Companies identified during this stage as possessing a significant opportunity to create value, typically over a three-year time horizon, and the management capability to execute are selected for the portfolio.
iii)Portfolio Construction: the size of new investments in the portfolio is determined by the consideration of three factors: the size of the investment’s value creation opportunity, its riskiness and the degree of diversification it offers to the existing portfolio. To aid portfolio construction, stocks are assigned to one of three silos within the portfolio, representing growth investments, value-turnaround investments and more tactical plays. The balance of the three silos is maintained within optimal ranges to help manage the risks posed by overreliance on any particular investment style and to ensure that the portfolio’s returns are driven by the team’s idiosyncratic investment ideas.
iv)Monitoring and Exiting: once an investment has been made, it is monitored on an ongoing basis against the valuation creation opportunity identified at the stock selection stage. This involves regular meetings with company management, evaluation of new information and updating of financial models.
Investments are exited either once the valuation creation opportunity identified in the investment case has been successfully realised and become well reflected in the stock price or when the prospect of realisation has significantly deteriorated for fundamental reasons.