We believe that time horizon is the key market imperfection. Owing to the structure of the market and the way in which most portfolio managers tend to operate, investors spend too much time focusing on short-term quarterly and annual data. Detailed empirical research on markets undertaken by our investment team strongly indicates that company analysis should be concentrated on a longer-term, five-year horizon.
Company analysis is the most important activity of our investment team. Forecasting a company’s prospects on a five-year time horizon is not easy and to be successful, analysts need skill and experience. At Edinburgh Partners, our investment team has both.
Our investment approach is long-term and focused on absolute valuation. We believe that adequately diversified, concentrated portfolios have the highest probability of generating good absolute returns.
We aim to identify and buy undervalued companies, and have the patience to hold them until share prices reflect their long-term earnings potential. Instead of being pushed off-course by short-term reactions, fear of being different from the crowd or a particular index, our judgments are based purely on long-term analysis of prospective risk and reward. It is a long-term approach, often contrarian, but for the patient investor we believe that it is the most reliable way to achieve superior absolute returns.
Past performance is not a guide to the future and the value of investments and the income from them can go down as well as up.
Analysing companies and successfully forecasting long-term earnings per share drives our process and underpins our performance. Each sector analyst is responsible for idea generation within their sector. A sector review is completed every six months and includes a formal sift.
The sift narrows the universe by excluding from consideration companies believed to be overvalued. The study demonstrates that companies with high year-five PE’s provide low or negative real returns. If the historic PE is improbably high in relation to the likely rate of profits growth, it is unlikely that research coverage would be initiated. This sifting process removes from consideration the majority of securities and allows more detailed analysis on a select few.
The next stage in the process involves the fundamental analysis of a company’s financial position and prospects. Each analyst uses a standardised research template which comprises five years of historic figures and five years of forecasts. This template is supported by more detailed financial models which generate a series of income statements, balance sheets and cash flow statements. The standardisation of the analyst’s research output provides discipline by forcing the analyst to express their views numerically and includes standard metrics to facilitate comparisons across sectors and countries. The analyst must also present a best and worst case scenario around their central forecasts, thereby forcing a clear consideration and quantification of the risks associated with each investment opportunity. The greater the range of potential earnings outcomes, the greater the risk in holding the stock.
Once a research document has been prepared by an analyst it is distributed to the rest of the team and presented at the weekly research meeting. All assumptions must be made explicit and will be scrutinised by the other analysts at this point. Only those stocks that pass this review process will progress to the Approved Purchase List. No stock can be included in a portfolio unless it is approved and on the buy or hold lists. Stocks on the sell list cannot be purchased for portfolios.
Corporate Governance and SRI assessments form an integral part of our investment process. Each investment is given a “score” which is considered when arriving at an analyst’s recommendation.