Background

Above the Index Asset Management Pty Ltd (ATI)was established in September 2004 as a boutique Australian equity manager, specialising in the manufacturing of long only Australian equity portfolios. ATI's investment style is premised on a ‘relative value' methodology, meaning that investments are generally purchased and held as long as they represent relatively good value.

What is ATI's Investment Style ?

 

What is ATI's Investment Style ?

ATI’s investment style is strongly based on the relationship between forecast earnings, relative market rating (RMR) and the current share price. The time horizon for forecast return calculations is three years.

ATI’s investment style can be characterised as:

  • Active with a relative value approach;
  • Using fundamental company analysis focused on understanding the composition and drivers of our earnings forecasts;
  • Assessing whether the market’s forecasts are realistic and whether the rating (RMR) that is being paid for these earnings is appropriate;
  • Using a capitalisation of earnings methodology for valuing all stocks in the investment universe to ensure consistency of approach;
  • Placing a greater emphasis on near term earnings forecasts;
  • Focused on buying stocks identified as relatively undervalued and selling stocks identified as relatively over valued;
  • Producing concentrated stock portfolios with no specific bias targets towards large or small capitalisation stocks;
  • Being tracking error and stock specific risk aware with a view to managing and controlling investment risk; and
  • Process driven with a disciplined methodology in stock selection and risk management.
     


ATI's Competitive Advantage
ATI sees its competitive advantage as being able to add value for clients by portfolio out-performance that arises from adding alpha (expected benchmark out performance) subject to appropriate risk constraints. Given its disciplined investment process, in-built risk controls and client management systems, ATI can manage individual portfolios for clients. This could encompass changes with regard to levels of acceptable tracking error, portfolio concentration, specific risk and fund size profiles to complement other managers.

ATI believes that its proprietary process of disciplined investing and prudent risk management will lead to superior returns and lower volatility in the long-term. Its primary focus is to deliver consistently higher than benchmark returns over rolling three-year periods with absolute volatility at, or lower than, benchmark and competitors.

The ATI Investment Process
ATI has developed an investment framework to capture relative outperformance (alpha) throughout the investment cycle. The investment framework (known as the Equity Ranking System or ERS) makes it difficult for ATI to do anything other than buy stocks when they are relatively cheap and sell stocks when they are relatively expensive.

To achieve this, ATI produces an ordinal ranking of the most attractive to the least attractive stock investment opportunities based on expected return. The expected return for each stock (calculated as an internal rate of return or IRR), is the difference between ATI’s target price and the current share price.

ATI’s target price is calculated by multiplying (capitalising) a blended 3 year forecast EPS by a through the cycle or average relative PE multiple (which ATI refers to as a Relative Market Rating or RMR).

ATI utilises a four stage investment process that provides the framework for portfolio construction to be consistent with its investment philosophy. This process is summarised below:
 



Stage 1


ATI’s stock universe initially comprises those companies in the S&P/ASX 300 index. These stocks are filtered by four quantitative factors (covering liquidity, market capitalisation and earnings profile) to arrive at a prospective grade universe (approximately 200 stocks).



Stage 2


Weighted 3-year earnings forecasts of all stocks in this prospective universe are produced by ATI analysts utilising a combination of internal, fundamental, bottom up stock analysis, in conjunction with market and broker information, allowing analysts to recommend to the Research Committee their best estimate of future earnings forecasts for a company. Analysts’ also recommend an appropriate though the cycle rating (RMR) to be applied to these earnings forecasts. The Research Committee then ratifies the earnings forecasts and the RMR.
 


Stage 3


 

A 70 factor qualitative assessment score (known as the QAS) is used as a negative screen to identify stocks that have too high a risk profile to be considered investment grade. ATI currently has an investment grade universe of approximately investment grade 170 stocks. 

 

Stage 4


From this investment grade universe, ATI construct a portfolio of between 25-40 stocks. The portfolio construction process aims to select the most attractive investment grade opportunities, subject to a risk overlay that includes pre-set constraints at the stock and sector level.
 

Research Effort Explained

Approximately 120 stocks are screened out due to liquidity; negative EPS; minimum earnings sources and minimum market capitalization. Each of the remaining ~180 “prospective grade” stocks are modeled by the ATI analysts to ratify the EPS, the RMR and the QAS score to be used within the ERS.

For each of these ~180 stocks a P&L, Cashflow statement and Balance sheet for the company are produced to which scenario analysis is conducted enabling the analyst to determine the impact on EPS when changing factors such as: composition of earnings impact on sales growth and EBIT margin. Other sensitivity is conducted on items such as Tax rate; D&A / Sales, Net capex / Sales; Inventory / Sales; Receivables/ Sales; Payables /Sales; net interest, Commodity price and FX assumptions.

More detailed analysis is conducted on companies that ATI feels there is a gap in the understanding by the market, are under researched or where the analysis conducted above is not (in ATI’s opinion) comprehensive enough. Analyst time is allocated to conduct more intensive analysis of these types of companies and involves further ‘modeling’ of the company that is more comprehensive than that above.

Analysts are also responsible for determining a qualitative assessment score (QAS) for each prospective grade stock. ATI utilises its proprietary QAS framework to assist analysts in determining some of the key drivers impacting a stocks valuation and the integrity of the earnings being used in the ERS.
The QAS involves an extensive qualitative analytical review that takes into account:

  • Key industry drivers (Porter analysis);
  • Key performance statistics obtained from financial data (ratio analysis)
  • Balance sheet strength, gearing levels and interest cover capacity (debt analysis);
  • Management ability and industry track record/experience (management analysis);
  • Current valuation in absolute and relative measures (valuation analysis); and
  • Key current issues (corporate analysis, ESG issues).

The QAS analysis is utilised in conjunction with company fundamental analysis enabling ATI analysts to identify the key issues that are relevant to the specific stock and assist them to determine whether or not a ‘prospective grade’ stock is ‘investment grade’. The overall review assists in screening out certain stocks that have a less attractive profile relative to other stocks in the same GICS sector and other stocks in the investment grade universe. The QAS enables stocks to be compared relative to the rest of the universe of stocks and also the specific GICS sector that the company is in. It assists in determining the relative attractiveness of the company in a disciplined manner.

The remaining stocks are considered the investment grade universe. An ordinal ranking of the investment grade stocks is subsequently produced by the ERS.

The research review process, conducted by the ATI investment team, includes an in-depth assessment of the prospective stock’s financial history, balance sheet strength, future earnings prospects, historical and implied relative market return (RMR), management ability and key valuation drivers.

A theoretical target price, taking into account capital and income components, is generated for each stock in the investment grade universe by capitalising the 3-year time weighted EPS by the RMR. The target price is then compared to the current share price to produce an internal rate of return (IRR).

The ERS then produces an ordinal ranking list of the investment grade stocks based on IRRs . The ERS allows ATI to direct its dedicated research effort to stocks of relative value as well as being a sell indicator tool for those stocks that show relative unattractive IRRs. This list forms the basis for the portfolio construction stage.
 

Portfolio Construction Explained

The ERS rankings provide the basis for the construction of robust, risk aware portfolios, sensitive to tracking error, stock positioning and client specific guideline considerations. The Portfolio Committee oversees the portfolio construction process and is responsible for the buy/sell decisions for each of the ATI portfolios.

ATI adopts a dedicated portfolio approach, selecting a theoretical model portfolio for each product from the most attractive of potential investments, wherever possible. The objective of the portfolio construction process is to create portfolios which conform to (and optimise) the conclusions of the previous three stages of the process. ATI’s management of equity portfolios is based on a model concept so that a common weighting of stocks is consistently applied to all similar equity portfolios, subject to mandate restrictions. The typical pre-set constraints that ATI uses are: