History has shown that investing in smaller companies can produce excellent returns for investors. It makes sense that growing businesses can generate substantial value for shareholders, especially if they can be identified early in their growth phase.
However, smaller companies can also exhibit significant volatility in returns, so an active, fundamental, research-based process is imperative.
At Flinders, we believe that the way to identify the most attractive opportunities is to undertake consistent, rigorous proprietary research and financial analysis. We are resolute in our focus on risk management in order to maximise gains and limit losses, leading to higher returns for our investors.
We are also committed to remaining agile. This includes being disciplined in limiting our size to a level that allows us to fully exploit opportunities across the smaller companies universe, and fostering a mindset of being responsive in our decision-making process.
OUR STOCK RESEARCH FOCUS
It is our research process that drives our ability to identify opportunities. Importantly, the research is driven by our team of talented and experienced investment professionals.
Our research is in two parts:
- Proprietary research of the company – its growth opportunities, applicable strategy, quality of management, industry dynamics, execution risks and ESG assessment; and
- Financial analysis of the company – modelling of earnings, cashflow and balance sheet, and the valuation of the company.
Our research is focused on answering five key questions about every company we assess:
From this research, we construct a portfolio of stocks in which we have a high conviction.
OUR INVESTMENT PROCESS
There are 3 key steps in our investment process:
There are two parts to our research approach, which help answer the five key questions about every company we assess . This provides the basis for the company valuation. They are:
- Proprietary research: An active company visitation program is a critical step in the process. This occurs with increasing frequency where we have a real interest in the company and even more if we include them in our portfolio. Additionally, we meet with industry groups, competitors and where we can, clients of the company. These visits drive:
- Our assessment of the company strategy, and management’s ability to successfully execute this strategy
- Our inputs into the financial analysis of the company (together with publicly available information); and
- How management addresses ESG factors in order to reduce long-term risks and protect shareholder interests.
- Financial analysis: We use our proprietary research to model the future earnings, cashflow and balance sheet of the company. Our modelling captures historical financials, and forecasts at least three years forward. For ease of comparison and peer review, our financial models are in a consistent format.
3. Portfolio Construction
The process for including a stock in our portfolio is in two steps:
- Investment Approval: A formal peer review is undertaken of stocks considered attractive and worthy of inclusion in the portfolio. Full models and the investment thesis are presented to the investment team for discussion and debate. This includes financial analysis plus the qualitative work undertaken at the proprietary research stage. The team will review this, along with the key assumptions and investment case of the stock. Stocks will either be approved, require more information or work before approval, or be rejected. To ensure robust debate and better investment decisions, both Portfolio Managers need to approve a stock for it to be included in the portfolio.
- Portfolio construction: Once a stock has been approved for inclusion, the position at which it is added is primarily driven by ranking the Assessed Company Valuation Report (ACVR) of the stock (relative to its current share price) against all other stocks under coverage. This rank captures the company’s forecast capital growth (i.e. the gap between our valuation and the current share price) and the expected dividend yield.
As a result, a portfolio of approximately 40 companies in which we have the highest conviction is constructed, overlaid by portfolio risk considerations, market conditions and portfolio guidelines.