Investment Styles
VALUE Management is choosing companies that are under-valued or out of favour, which we believe will improve significantly, over time. We need to be very alert for these opportunities as they can disappear as quickly as they become apparent. Further analysis and sector comparison is also required.
Value Managers will attempt to seek out the better valued companies within each sector of the market when constructing your portfolio.
Greater focus is placed on financial ratios such as the price/earnings ratio (P/E), dividend yield and cashflows. The P/E ratio is calculated by dividing a company's share price by the earnings per share. In its simplest form, a Value Manager will be attracted to companies with a low P/E ratio and a high dividend yield. These are fundamental aspects of any company.
A Value Manager tends to perform better during difficult or "bear" markets, as the preferred companies have solid dividend yields, these are defensive characteristics. Many of the world's best-known investors, such as Warren Buffett, are value investors.
Investment portfolios recommended to clients tend to be more VALUE oriented. This style will see portfolios produce steadier returns underpinned by the reliable support of a regular dividend income. Whilst the dominant investment style is value, we do not completely ignore fund managers which are pereived to be more growth oriented should be considered.
Some companies present above-average GROWTH prospects. These can often be located in certain sectors of the market, eg technology, where the market is anticipating a high level of profit growth in the near future. Usually the manager will be forced to pay above-market multiples for this growth potential. A growth manager will be of the opinion that a rapid rate of future profit growth will eventuate. Growth companies are characterised by high P/E ratios. Typically, growth investors will run a greater risk in whether the expected strong future earnings will eventuate or not.
Growth Managers tend to do better in strong or “bull” markets where, due to stronger economic forecasts, the high rates of profit growth anticipated can eventuate.
STYLE NEUTRAL funds have neither a specific value or growth bias in their portfolio composition.
In addition to the above investment valuation parameters, there are a number of other factors that are considered by fund managers before they included in their fund.
Quality – the company must be able to provide services or products that are of sufficient quality. The exclusivity of the product or competitive advantage is also very important. Fund managers are particularly keen on businesses with a competitive advantage.
Balance Sheet strength – appropriate levels of debt, and the ability to service this debt, are scrutinized. Prudent capital management is using this balance sheet strength, but overly-aggressive management can see a company's debt levels soar.
Management – the “captain and crew of the ship” must be experienced, focused, conservative and sound. A track record of success is also an advantage.
Earnings continuity – it is important to us that the fund predominantly comprises businesses that have a sound recurring earnings stream. This ensures regular dividends and gives a company greater flexibility in making decisions to enhance the earnings for shareholders.
Experience has shown that superios returns are always as a result of investment knowledge. To obtain sufficient knowledge and understanding of a business entails meeting with management and getting to understand a business in depth. Recommended fund managers endeavour to either meet with company management or use research prepared by analysts who have met with the company management.
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