Our investment philosophy is based on the belief that the pricing of individual stocks on the Australian sharemarket is at times inefficient.
Stocks sometimes trade away from their underlying valuation for a period of time. We believe it is possible to exploit these inefficiencies to deliver potentially superior investment returns. This is primarily achieved by identifying stocks trading away from their underlying valuation by:
- Taking a longer term view;
- Systematically conducting detailed bottom-up research, and
- Ensuring the risk taken is commensurate with the expected return.
We believe mispricing occurs for a number of reasons including the following:
- Investors take a short term view;
- Investors do not have a systematic process for assessing environmental, social and corporate governance issues;
- Investors over or under react to changes in a company’s operating environment;
- Sell-side analysis can be conflicted, leading to ill-informed stock recommendations;
- Investors make incorrect generalisations about similar companies, and
- Investors often extrapolate short term observations to the longer term.
Our broad philosophy can best be described as selectively contrarian. When a company is introduced into the portfolio it generally exhibits some characteristics which have caused it to be “out of favour” with the market. By this we mean such stocks are often universally disliked by investors who view the company’s current problems as permanent. They tend to be experiencing bad press and management are viewed as incompetent. The share prices of such “unloved” companies are often sold down on any news, good or bad; hence they end up as multi-year underperformers. By conducting detailed bottom-up analysis of the future prospects of a company we are able to come up with our internal valuations which are sometimes different from the consensus view or the current share price. These are the types of characteristics we generally seek in the companies we bring into the portfolio.
It is also important to note that not all such “out of favour” companies make good investment opportunities, which is why being selective is also critical to the process. Our experience, insight, detailed analysis and peer discussions are our guides when determining which “out of favour” companies are the most compelling investment opportunities.
Risks specific to investments in Australian equities may include share market and company risks, risks associated with the use of short selling and derivatives, investment management and style, portfolio concentration and liquidity risks. Please refer to the relevant fund’s Product Disclosure Statement for more information.