Process

Research led identification of top-down investment themes, after which specific asset(s) and opportune trading opportunities are identified. The research process consists of the following three consecutive stages:

  • High Level Ideas: Selection of Investment Themes with a 2-5 year horizon based on Macro, stylistic/sector specific or market/legal structures.
  • Medium Level Research: Systematic research of all LSE listed assets which allow the expression of the ‘High Level’ theme, and the selection of the assets (or basket of assets) which allow the most efficient expression of the ‘High Level’ Theme.
  • Low Level Quantitative and Trading Techniques: Once the asset(s) have been selected suitable structures and trading approaches will be developed in order to gain appropriate exposure.

The balance, diversification and risk control of the portfolio will be ensured through the blending of un-correlation investment themes.

Detailed description of the Investment Research Process

The investment process consists of the following three consecutive stages:

1) Generation of High Level Ideas: Macro, stylistic/sector specific or thematic Investment Ideas

The key driver of the out performance of the investment process is the identification of top-down, stylistic/sector specific or thematic investment ideas. The managers are seeking to identify investment ideas which will play themselves out within financial markets over a 2-5 year time frame. The mangers believe that through continuous systematic research and lateral thinking, they will be able to identify on average 2-4, such ‘High Level’ investment ideas per year. The managers also strongly support the view that it is not the number of such ideas which will determine the over-all performance of the fund but the quality of these ideas. For this reason the managers are highly selective in there acceptance of any such ‘High Level’ investment idea and numerous investment conjectures will be considered during any one year. Note that a ‘High Level’ investment idea will generally be formed from multiple underlying investment conjectures.

2) Medium Level Research: Value Oriented Fundamentally based, contrarian Research approach to select particular securities which efficiently express the ‘High Level’ investment ideas.

Once the ‘High level’ investment ideas have been identified by the managers, the managers will systematically undertake a search for securities which first allow these ideas to be expressed, and secondly offer the best risk/reward profile within the context of how the managers believe the high level idea will play out within financial markets. Though the fund managers would broadly agree and apply much of the traditional value investment methodology as detailed within the writings of Benjamin Graham and Warren Buffet, in particular the works:

  • The Intelligent Investor, by Benjamin Graham.
  • The Essays of Warren Buffett, edited by Lawrence A Cunningham, 2000.

The managers have developed a certain variant of this approach which is compatible with their own mental frameworks which they have applied within the various investment activities and markets in which they operate.

The managers have often found that the most efficient means in which to express a given ‘High Level’ investment ideas is by taking positions within under researched small cap (or even fledging) securities. The managers believe that the rationale for such findings is that these sectors are often the least covered by the research community, and in many cases are just to illiquid to be considered by institutional investors, and as a result the greatest inefficiencies often occur in such sectors. It is anticipated by the managers that investment companies and associated assets (many of which are fledging) will form a significant portion of the investment portfolio. Though such securities themselves are often small-cap the underlying securities which they hold are generally a well diversified collection of blue chip securities, and hence such investment companies do not pose a high level of risk to the investor. It should also be noted that due to the fact that over the past 10 years the managers have often found the greatest opportunities within this sector the managers have build up an expertise within the investment company and associated sectors.

Note: The investment process is not in any way either a small-cap or fund-of-funds approach. Any selection of either small-cap or investment company investments is taken purely because it is believed to be the most efficient means (i.e. best risk/reward profile) in which the express a given ‘High Level’ investment idea.

3) Low Level Techniques: Scalping/market making/technical trading, relative value quantitative techniques and the leveraging of the technology foundation of the fund managers.

This portion of the investment process will generally supplement and run in conjunction within the fundamental research (item 2 detailed above) which is undertaken. The portion of the investment process results from the particular technical skill set which the fund managers bring to the investment process. The technical skills can be divided into two sections: trading (scalping, MM strategies, TA), and quantitative/software. Below we provide further details:

  • Trading: Overlay the application of short term trading techniques such as scalping, various market making strategies and acting as a provider of liquidity. In addition, analysis of market internals and trading considerations from a technical analysis stand-point will be considered. The aim of this process is to provide more opportune entry and exit points within our fundamentally selected investment opportunities. In should also be noted that these techniques may also be applied during the period when a given investment idea is being expressed within financial markets. Where we envisage taking a general stance with appropriate holdings over an extended period, however within this period we either switch between associated assets on a relative value or market internals motivated basis, and/or scale in/out of the position in order to increase the risk adjusted return profile.
  • Quantitative Techniques and Software Platform: Since 1999, we have undertaken firstly the research of quantitative finance, and secondly the development of financial and mathematical software components (see http://www.webcabcomponents.com). These components offer a wealth of financial and mathematical functionality which is leveraged within our internal research systems. In addition, we have developed a proprietary data archive and quantitative finance research platform. This system can apply a variety traditional and state-of-the-art statistical and quantitative finance techniques including regression and time series analysis; pricing and risk (Greeks/global VaR methodology) analysis (for virtually all equity and equity derivative contracts in accordance with a number of price/volatility/interest rate model assumptions).