We apply fundamental analysis to asset allocation and investment research decisions. More specifically we use a top-down approach which seeks to identify and assess the impact of economic conditions and policies on global equity, bond and currency markets. The impact on individual countries and regions is then assessed, and finally the effect on individual sectors and companies within those economies.
When it comes to investment decision making at the company level we essentially buy two types of investments: Those that are there to provide capital gains and those, such as mature companies, bonds and preference shares, that are predominantly there to provide income. We then blend these in the proportions we believe to be appropriate for a given set of economic circumstances. The proportions in which we blend them, the level of gearing we run and our risk mitigation, including hedging, are influenced by our appetite for risk which is a function of where we believe we are in the economic cycle and our concerns over specific economic issues.
Growth and Income shares
When it comes to income stocks we look for stocks where the P/E is low, dividend yield is high, well covered by earnings and that are selling goods or services with a low elasticity of demand. In essence, safe investments with stable, reliable and predictable earnings streams.
However, when it comes to growth stocks the criteria by which we choose them is different. We like well funded companies, usually in the technology sector, with high quality management, that are selling products or services that are “disruptive” and which offer exceptional rates of growth that are likely to endure for many years. Ideally they should also be diversified.
Bonds and preference shares
In the case of bonds and preference shares two factors principally drive our selection process. Firstly, where we believe we are in the interest rate cycle and secondly, the issuer's creditworthiness and name specific risks. The first test is to determine the likelihood of capital gains or losses arising from interest rate movements. The second test is to determine the level of risk to future interest or dividend payments arising from name and sector specific issues.