At Chester we believe that cognitive and emotional biases’ of investors and other market forces create opportunities for stock prices and intrinsic values to disconnect. The fund seeks to exploit this through predominantly investing in companies with sustainable earnings growth reflected in their ability to generate free cash flow and therefore dividend growth. Valuation support is critical to ensure an appropriate margin of safety. Chester also seeks to exploit ideas where we believe the market has mispriced companies by extrapolating a poor near term outlook into the future. These ideas are more contrarian in nature but offer more compelling valuation support with downside risk somewhat mitigated by a valuation margin of safety.
Chester has a strong focus on capital preservation, although it is important to note that the investment process focuses on stock selection and there will be high company specific risk. We believe we can mitigate company specific risk to some extent by focussing on the three key risks in investing: operating, financial and corporate governance risk. Understanding the unique risks of each stock specific investment can assist in preserving capital through periods of equity market volatility.
Chester's universe is ASX listed or soon to be listed companies with a focus on the largest 300 by market capitalisation, plus select Asian listed companies with an Asian domestic consumption focus. This increases the investment universe by 40-50 investable stocks.
We believe there are multiple ways to identify opportunities/ideas in this universe but it requires rigour and focus.
Proprietary screening. To determine companies displaying extreme value disconnect or companies operating in attractive end markets with compelling industry positioning, sustainable earnings growth and cash generation with a margin of safety to intrinsic value;
Thematic trend review. Chester also invests using long term thematic trends such as Asian Consumption. We believe understanding consumption patterns in China is a major influence in driving the Australian equity market and property market.
Ongoing company visitations. We aim to hold over 500 company meetings or conference calls per annum; and
Discussions with industry participants. This is a key component of generating unique insights into a company and their corporate strategy and future earnings potential.
This idea generation forms a focused watch-list that meets the combination of valuation support with a quality framework for assessing the merits of an investment idea.
- For a stock to progress from the watch-list to the portfolio it has to pass through our risk filter assessment, looking at the operating, financial and corporate governance risk.
A rigorous and disciplined fundamental stock selection process is overlaid with macroeconomic insights and company life-cycle and sector diversification to create a portfolio of approximately 30 (a minimum of 25 and a maximum of 40) stocks.