INVESTMENT APPROACH & PHILOSOPHY

Transcription

1 INVESTMENT APPROACH & PHILOSOPHY

2 INVESTMENT APPROACH & PHILOSOPHY - Equities 2. Invest regularly 1. Invest early 3. Stay Invested Research: We receive in-depth research on companies and the macro environment (collective research) from multiple independent analysts and investment banks. In depth analysis of these reports provides us with an independent, unbiased view and conclusion towards specific companies. This, together with macro and micro economic analysis provides us with the ability to construct our clients portfolios knowing that we have done our research thoroughly. We believe that collective research is very critical as it provides us with an unbiased, holistic view of the economy. Our Investment beliefs: Capital Preservation This is of utmost importance and we centralise our investment philosophy around this principle. At Capilis we have proven that we prevent losses by strategically aligning our clients portfolios to the current economic climate through constant macro-economic research and risk analysis. Top quality businesses with good management and earnings profiles Companies that consist of the ability to deploy capital efficiently normally tend to trade at a premium. However, these companies deliver on a compounded basis which truly justifies the premium. They also have a proven track record and consist of a smooth earnings profile that consistently manage to beat, or at the very least reach analyst forecasts. As long as the companies can continue to perform according to expectations, they will trade at a premium to their peers and won t de-rate to a lower P/E multiple. Defensive businesses In difficult economic conditions, we may shift our portfolios to more defensive stocks. As they are less correlated to the overall market performance, these are companies that tend to deliver the same set of results irrespective of the macro-economic conditions. Examples include tobacco, beverage and food companies. 1

3 Deep Value investing - In a South African context, we see value investing as a problem area. There are simply not enough mature businesses that trade at a discount in order to justify basing an entire investment strategy on it. Companies showing good value relative to its peers and the market tends to be problematic with low earnings and growth expectations. If a company trades at a large discount, it could take years for the market to realise the value and the probability of a stock re-rating to a more acceptable P/E multiple are low. New opportunities We always keep an eye out for new listings, corporate restructurings, book builds, share placements etc. in order to unlock extra value for our clients. Liquidity carries a premium We place a premium on the ability to enter and exit a position with relative ease and the premium depends on the size and time horizon of the position which are normally dictated by the clients risk ability. In troubled times, liquidity becomes very important and therefore it is not something to overlook or underestimate. Clear strategy on company results Thorough planning is done before expected result announcements, as these tend to move the share price significantly. When a company s results misses analysts expectations, selling pressure will step in and immediately start pushing the price down. If the results were very poor the downward pressure can last for an extensive amount of time. The opposite takes place when a company has outperformed and exceeded the general consensus. Planning ahead gives us a clear step by step plan to execute a strategy as soon as the results are released, which could lead to a couple of percentage points gained if executed before the overall market starts to digest and act on the information. Main parameters that we look at include: Headline earnings per share (HEPS); Earnings per share (EPS) - specifically once off items realised; Quality of earnings; Balance sheet gearing i.e. debt ratios; Management commentary - normally gives a good indication on the strategic position and profitability the company finds itself in. Future prospects and general market conditions also provides clues on the confidence management have in future earnings prospects and goals being reached. 2

4 Our core philosophy drivers: Pricing Power Pricing power, or the ability to control and set prices, is a very important driver. We believe that these companies have a competitive advantage and are able to create revenue stability and a long term growth profile. We tend to steer away from companies that are highly affected by uncertain commodity prices and other input costs. High return on equity Stable or rising return on equity and capital employed is probably one of the most important drivers. Companies that generate high, but declining return on equity is not preferred. A bad investment outcome can be expected if the market prices a share according to sustainable ROE levels. Simple business models Companies with easy to understand business models usually tend to perform very well over a period of time. In difficult times they tend to pull back less than more complicated and intricate companies. This can be contributed to the fact that investors are scared of the unknown in turbulent or uncertain times they tend to withdraw from investments in companies they don t thoroughly understand. Organic and acquisition based growth ability We prefer companies that are able to grow their revenues i) organically and ii) through acquisitions or bolt-on acquisitions. Organic growth is usually not that difficult to achieve for companies that are well matured and whose revenues are linked to inflation priced increases. Effective management teams normally unlock organic growth via marketing channels, increased product and service offerings, continuous cost cutting and more effective production and service delivery methods. Instead of paying out all of the profits to shareholders via dividends, some companies retain earnings in order to grow their business via acquisitions. If done correctly, there s normally a long-term value unlock in the share price and is thus beneficial for the investor. Business models that are not capital intensive Businesses that can achieve growth without having to deploy too much of their own capital are preferred. Although we know that there are not a lot of these businesses in the local market, we constantly keep an eye out for them. Stable earnings profile Businesses that are able to consistently achieve stable growth, even through tough economic conditions and market headwinds, are preferred. Cash generative These companies tend to have short working capital cycles, with quick product/service turnover and low working capital requirements. We do not however close the door to companies with high working capital requirements; they need to achieve above average returns to compensate for the lack of dividend pay-outs to investors. 3

5 Investment Styles Traditionally, investment managers tend to follow certain investment styles in order to try and achieve alpha (outperformance) for their clients. These investment styles include: Value vs. Growth Value investors tend to buy shares of companies that are undervalued. These type of shares tend to be your popular and mature businesses i.e. companies with low growth prospects. Various factors can contribute to this; i) underestimated earnings ii) negative publicity hampering the image of the company or iii) being undiscovered by the market. Investors believe that once the tide turn they will be handsomely rewarded by buying low and selling high. Growth investors target companies that are in their growth phase and where there is an expectation to keep growing at a minimum rate per year. As long as the future of the company looks bright, these shares will be bought by investors irrespective of their valuations. Contrarian vs. Momentum Contrarian Investors like to go against the momentum of the market. In other words they tend to do the opposite of what the investing crowd is doing. Most of the time they sit on the fence and wait for specific opportunities. Irrespective of the price of the share, momentum investors will invest in a company s share as long as it s got momentum behind it. They tend to ride the share until they sense that it is losing momentum/strength and thus their motto: buy high, sell even higher. Technical Analysis vs. Fundamental Analysis Technical analysis involves the study of charts, patterns and specific triggers. Their decisions are purely based on stock price movements and are not affected by the fundamental soundness of the respective stock. These invetors typically buy and sell stocks much more frequently than fundamental investors. Fundamental Analysis is the more traditional investment style where investors only buy companies with sound balance sheets and business prospects. These investors have a much longer term view than technical investors. Active vs. Passive Active investors or portfolio managers tend to rebalance and change the composition of a portfolio or pooled investments quite often. They believe that through their investment research they can strategically buy and sell shares in order to outperform the market. If you are invested in an ETF that tracks an index of some sort, your investment is seen as passive. We have created the ability to adapt in order to outperform the competition; we honed our skills and constructed an investment style that combines all the above-mentioned styles in order to maximise the alpha that we can create for clients. The world of investing has become more complicated and it would be unwise to pursue one specific style - being dynamic is the key in the modern, ever-changing investment world. 4

6 INVESTMENT APPROACH & PHILOSOPHY - forex Fundamental & Technical Analysis Our principle approach and philosophy is based on the view that the Foreign Exchange Markets doesn t adhere to the strong form of the Efficient Market Hypothesis (EMH). Through top-down macro and fundamental analysis, price inefficiencies can be identified and taken advantage of. Our in-house, fundamental analysis techniques brings to light areas where the market has potentially over or under-valued an asset. In addition to our fundamental analysis, constant technical analysis provides a detailed view of the preferable timing to enter an incorrectly-priced asset. Wealth Preservation The most important objectives in the management of client wealth is the preservation and consistent return of capital entrusted to us. In addition, we aim to achieve a high return by setting an internal benchmark target. The parameters of our objectives and aims provide us with a clear goal that we endeavour to meet. Trade Positioning To meet our targets we manage our risk thoroughly by setting precise price targets and monitoring them constantly. Our price targets are adjusted according to the stage into which the position develops. At the beginning, we label it either a long term view, medium term swing or a short term trade which helps us to determine the price targets we set and the size of our investment while managing our over-all exposure. Continuous Research Monitoring of each trade and market changes is key in keeping up to date with price changes in an asset. Continuous research and analysis of news, data and opinions from a wide spectrum of highly reputable news agencies, brokers and investment houses is a daily priority in keeping up with a fast changing environment. Reputability of our sources is key in identifying long term fundamental trend developments, medium term sentiment or cyclically-driven swings and market noise behaviour. Certainly, a high level of emphasis is placed on the monetary and fiscal policies of major central banks as they dictate and change the views we may have on foreign exchange pairs. We anticipate all high priority economic indicators at the moment of their release and watch the market reaction to determine the markets focus and subsequent movement. We also compare and group economies into the following categories: developed emerging developing risk-on/risk-off safe haven commodity reliant industrial reliant energy reliant agriculture reliant export reliant etc. By grouping each economy we create a better and more precise understanding of how global changes influence each economy. For example, when OPEC (Organization of Petroleum Exporting Countries) decides to over supply the oil market to regain market share, the demand for the currency of an economy reliant on exports of petroleum decreases through a series of economic mechanisms and we can invest accordingly to take advantage of such developments. 5

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