The universe – generating investment ideas
Our investment universe consists of over 1000 stocks, greater than $3 billion in market capitalization. Each sector analyst is responsible for using his or her expertise to come up with a working list of stocks within his or her respective area. Investment ideas stem from internal fundamental research of both companies and the industries in which they operate and compete. While our analysts utilize brokerage research as a source of company and industry information, all portfolio recommendations are based on our own in-house research. We also work closely with the global equity team, leveraging each other’s sector expertise to bring greater insights into our idea generation. At a strategy level this ‘workable list’ typically totals between 200 and 250 stocks.
From working list to purchase candidates
When looking for investment ideas, the analysts consider stocks for one of two ‘growth gap’ categories; secular and opportunistic. The analysts use their sector expertise and industry knowledge to select stocks that they believe can benefit from the respective story. On a company specific level, the analysts are expected to evaluate a company’s prospects for growing top-line revenues, improving operating margins, and potentially redeploying cash. Having identified a number of stocks of interest within a sector, the analyst then carries out rigorous analysis of the company and the industry in which the company operates and competes, building up a comprehensive picture of a company’s strategy, competitive positioning and industry dynamics. This is achieved through a mixture of one-to-one meetings with management, industry conferences and site visits with senior company representatives, their competitors and other industry participants. It is during this stage of the process that we construct our earnings ‘growth gap’ model.
Once we have determined that a potential exploitable earnings ‘growth gap’ exists, we then try to determine if it is sustainable. This determination is underpinned by intensive bottom-up research where we evaluate a company’s business prospects as well as quality, which include management track record and corporate governance. We view valuation as complementary to our investment thesis and lastly evaluate price, looking at fair market value, and value in comparison to the sector and universe. The result of this extensive research process is a stock ‘grade’. Our analysts grade stocks from 1 to 4. Grades 1 and 2 indicate a buy recommendation and grades 3 and 4 indicate a sell recommendation. There is no hold recommendation, which ensures analyst conviction in grading stocks. The list of purchase candidates typically consists of 100 to 125 stocks across the strategy.
