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1. Quantitative Screening
This process involves screening a sector or an entire market (e.g. TSX) for financial variables including valuation, financial positioning, historic growth profile, profitability etc. We have the resources in-place such as extensive computer models and databases that provide us with the ability to effectively screen specific information such as P/E, ROE, cash flow, revenue, and debt on a sector by sector and company by company basis. This essentially then allows us to short list companies that have attractive risk/return profiles based upon historical financial information.
That said, while a company may have a great Income Statement and/or Balance Sheet, we all know that numbers can be misleading or in some cases manipulated. It brings to mind the old Benjamin Disraeli quote, “there are three kinds of lies: lies, damned lies, and statistics.”
2. Qualitative Analysis
This process involves researching such areas as the management team, the underlying quality of the product or service, competitors, growth prospects, barriers to entry, regulatory issues, etc. Basically, we diligently screen our short listed companies by the quality of their management team, underlying assets, and current valuation.
This information can be obtained through Primary or Secondary sources. Traditionally we would read all of the Secondary Sources first, which includes all of the available street research i.e.) the major Broker Dealers in North America and any newspaper, magazine, and internet information. If we have further questions we also have access to many of the analysts who publish the research through previous long-standing relationships. We then try to follow this up with Primary Research whenever possible, which involves meeting with management to fill in any gaps and ask any specific questions that have formulated from the Secondary Research.
3. Option Overlay
As a last and final step, we then apply an Option Overlay to the model portfolio. Utilizing Put and Call Options can add an extra layer of risk management as well as providing the potential for adding further income to the portfolio. The excellent benefit of option strategies is that they can also be tilted according to our views of the market and/or of a specific security.
Asset mix is top-down utilizing a formal macro process with weights adjusted according to an individual client’s risk tolerance and Investment Policy Statement.
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