INVESTMENT PHILOSOPHY & PROCESS

Our investment philosophy for management of equity portfolios:
Bottom-up stock selection, combined with top-down risk management and control

• Companies with winning business models can sustain superior earnings growth
• Earnings growth, whether high or low, is often undervalued
• Fundamental, primary research can identify these companies
• Top down asset allocation to control risk

Our disciplined investment decision process is based on a team-approach and is structured as follows:

1. Growth and Quality

Stock ideas are generated at the market and sector level from the stock universe. We look for stocks which show good potential for both secular and internal earnings growth. Through our extensive research and local market awareness, we aim to avoid predictable threats to a business, whether technological, regulatory, or via competition.

When looking at the quality of a company we look at a balance between growth prospects, quality of the company and valuation.

Thus critical qualitative factors include:

• Management / changes in management,
• Type of business,
• Proprietary technology,
• Barriers to market entry / relevant legislation,
• Earnings growth,
• Quality of balance sheet and other financial factors,
• Mergers, divestments or restructuring proposals.

2. Valuation Discipline

Upon identifying growth and quality, we assess whether the company is available at reasonable value. We use, among other measures, P/E relative to market / sector, book value and price to cash flow etc. to measure a company’s value.

The same commitment to research, philosophy and process is pervasive across all sectors, countries and regions. Nevertheless analysts make use of various tools when analyzing stocks in different sectors including:

• Appropriate business model/industry.
• Valuation triangulation emphasises the use of multiple valuation methodologies in deriving a target price for individual companies.
• Price/earnings ratio relatives (for companies that achieve steady earnings growth).
• Relative multiples of peak earnings (for companies that have cyclical profits).
• Price to net asset value (for asset based companies such as property companies).
• Price/cash flow (for loss making companies).
• EV/EBITDA (Earnings Valuation / Earnings before Interest, Taxes, Depreciation, and Amortisation).
• DCF, DDM, CFRO I estimation of NPV.
• Peer group comparison
• EV/EBITDA (Earnings Valuation / Earnings before Interest, Taxes, Depreciation, and Amortisation)

3. Security Selection

We employ a common voting system to assess overall opinions and determine stock weightings

The authority for “buys” is driven by a disciplined team process based around a stock rating system. Stocks are chosen for their growth prospects and therefore analysts naturally monitor stocks for their long-term suitability for equity portfolios. 12-18 months would be considered the minimum holding period although in general our investment philosophy is geared toward a long-term three year period.

For fixed income portfolios, accurate identification of economic and interest rate cycles is critical. This will broadly determine the duration and credit risk of securities that we would consider investing in.

4. Portfolio Construction

Portfolio construction is predominately judgementally-driven focusing on using the best investment ideas from the research process. The portfolio managers look to add value by taking active positions versus the benchmark where our bottom-up stock selection process identifies investment opportunities.

Each portfolio is constructed through a thorough assessment of every client’s requirements. As a fund manager, our primary objective is to achieve the optimum total returns on the client’s assets under our management, commensurate with the degree of risk specified as acceptable by the client. We believe that a full knowledge of a client’s performance objectives and risk tolerance is indispensable to successful portfolio management.

5. Risk Management & Controls

The portfolio would be monitored daily with regard to the portfolio’s position in relation to the benchmark, sector exposure, investment restrictions and other client guidelines. The CIO would review the portfolio on a regular basis to ensure consistency with the recommendations, process and client guidelines.

The order management system which the fund managers use in the day-to-day management of the portfolios has a compliance module that highlights any potential breach of client guidelines at pre-trade level. The MIDF Group’s Compliance unit also conducts regular checks on the portfolios to ensure their compliance with the stated guidelines.

Investment meetings are held between the clients and us at regular intervals to ensure that the client is fully apprised of their portfolio’s progress and they are aware of our intended investment strategy at that particular time will be. It is a useful forum to measure the fund manager’s intentions against results, and most importantly, those results against the clients’ own expectations.