Chester’s investment process provides a disciplined framework for investment ideas to be captured and translated into portfolio positions that are profitable for investors.
There are three key phases in the investment process.
Why we focus on a disruption thematic
“It’s the catalyst that can make today’s darling stock – possibly one that’s in many portfolios today – succumb to a new player that’s literally come from nowhere.”
1. Idea Generation
The investment team are constantly on the look-out for new investment ideas. At a top down level, thematic trends and sector themes provide a rich stream of new ideas, and typically the trends are cross-referenced or proven with bottom-up intelligence gained from company and industry meetings.
There are five key thematics the investment team consider:
- Technology advancement
- Changing consumption trends
- Government debt levels
- Aging populations
A Chester screening model helps the team identify which ideas qualify for further research and investigation.
The investment team define each company they research as either:
|Predictables||Companies with relatively predictable free cash flows|
|Cyclicals||Companies with less predictable cyclical free cash flow|
|Defensives||Companies and holdings that are not correlated with the sharemarket|
Within each company type are industry sectors such as financials for Predictables, energy for Cyclicals and gold for Defensives.
The investment team can dial up the weighting of the portfolio to Defensives in times of market stress, and vice versa when valuations are attractive. This acts as a defensive sleeve to help protect investor capital during drawdown phases.
Each company type also has an association with life cycle principals. Predictables are dominated by mature companies and a high representation of growth companies. Cyclicals have a mix of mature, growth and emerging companies while the Defensive category predominantly involves investing in the best bottom up stock ideas in the gold sector.
In their qualitative assessment of each company, the investment team consider three factors: quality, value and edge. The relative importance of these factors is different for each company type.
3. Portfolio construction
From a universe of 300 Australian stocks, the investment team define a watch list of approximately 80 stocks, with the portfolio typically holding about 25-40 stocks.
The process to build the portfolio is driven by the interaction between company lifecycle weightings, sector allocations and underlying stock selection.
Although the portfolio is concentrated in nature, there are position limits in place to help ensure stock risk is mitigated and diversification is maintained within investment guidelines.
The largest stock position is limited to 10% of the portfolio, and that applies to an Australian large cap company that is attractively priced and where the investment team have the highest conviction. Companies with a smaller capitalisation have a lower maximum limit of 5%.