A HIGHLY DISCIPLINED INVESTMENT APPROACH

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:

1. What is the growth potential?

We identify the key drivers of growth, which can be organic (due to superior market fundamentals, relative competitive positioning etc), by acquisition or cyclical. We also consider the sustainability of growth.

2. Can management deliver?

We determine whether a management team can successfully execute a business strategy to exploit growth opportunities.

3. What’s the financial strength?

We determine whether the company has the balance sheet strength and sufficient working capital to support their growth aspirations. Our financial modelling helps us determine facet.

4. What are the risks?

Through our company, industry and market knowledge, we assess whether any material risks are at play, whether they can be managed and how they may impact future prospects and valuation.

5. What price should we pay?

To determine the relative attractiveness of the opportunity, we derive a company valuation using our detailed financial modelling. This is compared to the prevailing share price as well as all other company valuations in the universe of stocks under coverage.

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:

1. Ideas

From nearly 2000 listed stocks, we screen out companies with unacceptably high financial risk (measured by leverage ratios), poor liquidity or have a market capitalisation that is too small. This reduces the number of stocks to 300-400 that we can focus on.

2. Research

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.