We look to see whether:
- Top line growth is coincidental with operating margins
- Earnings are driven by operations or capital management
- Free cash flow can sustain debt
- Whether significant financial ratios, such as Return on Equity, conform to our estimations.
We also undertake a qualitative screening process which introduces an assessment of:
- The macro environment
- The business and credit cycles
- Sector issues and preferences
- Specific operational strengths, weaknesses and challenges of identified companies.
Risk factor analysis determines our style bias. Back testing confirms that the market remains in prolonged cycles, driven by either growth, value or momentum. The quantitative process is dynamic and adjusts to style rotation. Style shifts tend to take place in tandem with major events such as stock market crashes, the emergence of ETF’s or a change in interest rate cycles.
Being slightly more quantitative and mathematical in our investment approach, risk management becomes an integral part of each step in the investment process