Stock selection

We have developed an investment framework, known as the Equity Ranking System (ERS), to capture relative outperformance (alpha) throughout the investment cycle.

We use a 4-stage process for portfolio construction as summarised below:

Stock selection flow chart_brand colour cropped

The initial screening process filters for attributes such as liquidity, negative EPS, minimum earnings sources and market capitalisation. 

Scenario analysis is conducted on prospective grade stocks to determine the impact of factors such as composition of earnings impact on sales growth and EBIT margin, along with other sensitivities such as tax rate, exchange rate and commodity prices. More detailed and comprehensive modelling may be done where we feel this is required. 

Our proprietary qualitative assessment score (QAS) methodology in-conjunction with company fundamental analysis allows us to understand the key drivers impacting the valuation of a stock and the integrity of the earnings being used in the ERS process and whether a ‘prospective grade’ stock is in fact ‘investment grade’. The process allows us to compare a stock against the total universe and within specific sectors to determine its relative attractiveness.

The resulting investment grade stocks are then ranked by the ERS. A theoretical price target is then compared to the current price to produce an internal rate of return (IRR) and the ERS system will generate rankings according to the IRR. This allows us to dedicate our research efforts to stocks of relative value as well as being a sell indicator when IRRs are relatively unattractive. This list forms the basis of the portfolio construction stage.