|
The steps in the Company's investment process can be summarised as follows:
- Identify undervalued asset situation;
- Identify catalyst;
- Quantify downside risk;
- Quantify upside and compare to downside risk; and
- Make investment decision and asset allocation.
The first step in this process is to identify companies which are trading at share prices below the underlying value of the assets of those companies. These situations are predominantly sourced from the universe of companies listed on ASX. They are often smaller companies as the Manager has found that smaller, under-researched companies generally offer a greater chance of being mispriced by the market. The Manager intends to identify potentially undervalued asset situations by continually reviewing available information, including information sourced from other market participants.
Companies can trade at a discount to the underlying value of their assets due to many factors, including but not limited to:
- negative sentiment towards the company or its industry segment;
- poor recent earnings performance;
- poor general economic or stock market conditions;
- lack of liquidity;
- potential litigation;
- undergeared balance sheet; and
- poor marketing of the company to the investment community.
Once a potential undervalued asset situation is identified, the Manager rigorously reviews all publicly available information and holds discussions with management where possible to assist it in completing the remaining steps in the investment process.
Identifying an undervalued asset situation, on its own, is not enough to assure success. Some companies which are trading at a discount to their underlying asset value may always trade at a discount. Therefore it is important to identify a catalyst which is expected to cause the discount to valuation to be reduced or removed. This is the second step in the investment process.
The catalyst may already have occurred, or the Manager may have reason to believe that such a catalyst may shortly emerge. Catalysts include, but are not limited to:
- takeover;
- return of capital;
- sale of assets;
- share buyback;
- changes to management or board of directors;
- changes in shareholdings, especially where a new strategic shareholder emerges, where a perceived overhang is removed or where an undesirable shareholder exits;
- listing on an overseas exchange;
- spinout or demerger of assets;
- special dividends;
- improvement in earnings or earnings momentum;
- value creating or enhancing acquisition; and
- improved marketing of the company to the investment community.
The Manager looks for a catalyst which is likely to occur or have its effect within six to 12 months. If the catalyst is likely to be longer than 12 months, the Manager keeps a close watching brief on the identified situation and revisits it when the catalyst is closer.
The third step in the investment process is to quantify the downside risk in the identified situation. This is a key part of the investment process due to the Manager's focus on capital preservation. It is essential to know where the 'safety net' is if the situation does not unfold as envisaged.
The fourth step is to quantify the expected upside in the identified situation. The expected upside is compared to the downside risk, along with an assessed probability of each outcome.
The final step is to determine whether an investment is warranted and if so, what percentage of the Portfolio should be allocated to that particular situation. The allocation depends on the level of certainty, timing, downside risk, liquidity and other available opportunities.
Investment Objectives |
Investment Strategy | Investment Process |
Portfolio Construction | Permitted Investments
|
