Vontobel employs a five-step investment process.
The first step is a quantitative screen that eliminates companies that exhibit any one of the following characteristics: high leverage, deep cyclicality, high capital intensity and low ROE.
Our qualitative analysis starts with step 2. In steps 2 and 3 of our investment process, we analyze both past business economics and potential future opportunities. The fund manager and his team put great emphasis on understanding underlying business features as well as the relevant accounting issues. In addition, as a third step, an in-depth evaluation of the certainty of the long-term economic characteristics of each individual business and the quality of its management in terms of their ability to realize the full potential of the business is conducted.
Step 4 of our investment process focuses on price/valuation. To be admitted to our portfolio, the market price of each company should have a significant discount to future earnings, cash flow and/or net asset value.
Step 5 is portfolio construction. We seek to add alpha through bottom-up stock selection. Guidelines ensure stock selection drives performance while providing adequate diversification. Generally, no single holding accounts for more than 5% of the portfolio at cost. Portfolios typically hold 50-90 issues. Cash is a residual of the investment process, typically less than 5% of the assets.
Estimating Fundamental Values and Buy Decision
Valuation methods focus on identifying stocks trading at the greatest discount to future earnings, cash flow and/or net asset value.
Our investment team monitors the key tenets of our buy discipline – consistency, predictability, profitability, sustainability and sensible price. We will remain invested in a business unless:
- The market price of a business exceeds our estimate of fair price
- It is involved in a major acquisition
- Its earnings growth, profitability and predictability deteriorate
- It is replaced by a better investment
Portfolio Construction Process
Bottom-up fundamental research drives the country and sector diversification. Guidelines ensure stock selection drives performance while providing adequate diversification. Generally, no single holding accounts for more than 5% of the portfolio at cost. Portfolios typically hold 50-90 issues. Cash is a residual of the investment process, typically less than 5% of the assets.
At Vontobel we are wary of investment concepts that equate risk with beta and other volatility-related statistics. These numbers are calculated from price movements in the past, while we think risk involves future uncertainty. We believe that the majority of a holding's risk is business risk as opposed to market risk. Therefore, we seek to control business risk by concentrating our portfolio holdings on high quality businesses that are characterized by operational stability, predictability and sustainability at sensible prices. We further control risk by adhering to portfolio construction guidelines that provide adequate diversification.