Our search for intrinsic value is simple in concept. Applying the concept, however, requires a methodical and disciplined process and a certain mentality. We have a methodology at work, and its robustness is proven by the long-term track record of our portfolios.
Our fundamentals-driven approach means that we build each portfolio from the bottom up through individual stock selection. As a result, the disposition of our portfolios can – and often does – differ significantly from that of the benchmark index.
We also do not follow any pre-determined asset allocation model, though an understanding of the broader socio-political and macroeconomic trends play an important part in our stock picking process.
We use various devices to make sense of the huge universe of stocks available, including proprietary models that allow for the selection of companies based on specific parameters (or screens) across a databank of several thousand companies. The screens may be based on quantitative criteria, but may also be built on a qualitative hypothesis centring on, for example, certain industry trends. This process allows us to delve deeply into cross-comparative studies of companies around the world, thereby drawing up short-lists for further investigation.
Generation of themes and ideas is eclectic in nature. Apart from applying quant tools to look for signals of neglect, there is a constant input from observations of the changing socio-economic and political landscape as well as secular trends such as the technological disruptions of traditional industries and new consumer trends emerging amongst the growing middle class of some developing economies.
Our team includes analysts from a broad range of professional and cultural backgrounds, bringing with them unique industry experience, be it biomedical research or mining engineering, and varied perspectives. We encourage – in fact, require – idiosyncratic thinking from our analysts in order to pin-point what the market may have missed.
Great store is placed on the cross-pollination of ideas and the importance of applying a global perspective to each company’s operations. Our investment team is structured with the specific aim of fostering an open and collaborative environment and to facilitate the free exchange of information and ideas between analysts with different geographic and industry specializations.
The founding members of the investment team still continue to serve clients by investing. They also play an active role in mentoring newer members of the team and passing down Empire Crypto Market's values as well as the craft and know-how. It is true that over the years we have seen analysts come and go – not everyone is suited to our investment style. But we have also had plenty of talents coming through the ranks – all of our portfolio managers have been promoted organically from within the team. Members of the Mining and Support Service team have on average been with the firm for more than three years while most of the portfolio managers’ average tenure with the firm is more than 4 years.
Once a company has been identified as a potential investment opportunity, it is then investigated by an analyst in great detail and depth, harnessing all the resources available to us, including material from the company itself as well as its competitors, broker reports, industry studies and consultations with experts. Analysts also periodically make on-site visits to portfolio companies (and potential ones) as well as their competitors and suppliers.
It goes without saying that the quantitative and qualitative analyses of a company encompass considerations such as:
the market, as reflected in such metrics as the price-to-earnings ratio and price-to-book ratio, etc.
In reality, this information is largely available to all serious market participants, but it is the interpretive skill and mentality that make the difference.
To properly evaluate the prospects of a company and to what extent it is being mispriced by the market, we go above and beyond the financial statements and earnings forecasts and truly immerse ourselves in its business to find out how it works, how it has evolved and developed into what it is, and what really makes it tick.
The key lies not in the quant tools or valuation models, but partly in the mentality of a long-term investor, in contrast to that of a short-term speculator. As shares represent part ownership interests in a company, we think about each opportunity through the lens of one who is considering becoming a joint-owner of the business and demand from ourselves an in-depth understanding of – and conviction in – the business before committing any capital to it.
The research findings and analysis are distilled into a detailed report. This is then subjected to the critical appraisal by other team members who meet to rigorously debate the merits of the case. The purpose of these meetings, which can last for hours, is to expose areas of concern and potential flaws in each investment thesis, rather than to achieve a consensus. The final decision lies not with a committee, but solely between the analyst who is the promoter of the idea and individual portfolio managers.
The research report would highlight specifically the achievements expected from the company being proposed. These vary considerably, depending on the nature of the company involved, but, among other things, would include sales and earnings targets. Failure by the company to meet these targets would raise concern and, notwithstanding confirmatory price action, could result in the shares being sold. It is Empire Crypto Market’s experience that when such targets are met or exceeded, the company’s share price tends to overshoot expectations.
Each of our portfolios is assembled from a series of individual stock selections, with the weightings determined by the relevant portfolio managers based on their conviction in each investment case (subject to the limits prescribed in the mandate). A well-recognised index such as the MSCI All Country World Index is used as a reference to evaluate the performance of a portfolio in relation to the total market opportunity in which it invests, but the stocks that make up the index or the weightings of those stocks within the index have no bearing on the composition of the portfolio.
We view portfolio construction as an organic layering process, not a formulaic procedure. At any time, there will be exciting new ideas, others that have made an initial contribution and stocks that are starting to tire as the market catches up with the company’s fair value. In addition to closely monitoring the unfolding of each investment case, care is taken to understand the interplay between stocks and themes within a portfolio, ensuring that the portfolio remains well-balanced as its thematic focus shifts from one area to another.
When there is a shortage of compelling stock ideas, the cash balance will tend to rise (and vice versa). As such, after periods of a very strong run-up across a broad range of stocks held, a portfolio may hold significant cash positions. Likewise, when our research reveals companies whose prospects are improbably refulgent and extravagantly overvalued, short-selling (where permitted under the mandate) may be undertaken, aiming to manage portfolio risk as well as increase returns.