Our Investment Process

‘A truly unique partnership between detailed analyst-driven fundamental research and specific targeted quantitative research inputs.’

Our teams use a unique combination of fundamental and quantitative research when constructing the portfolios. An earnings revision approach requires deep fundamental analysis to understand the specific drivers and the sustainability of a company’s earnings. This results in a valuation and forecast for expected earnings growth into the medium term for each company covered. Fundamental research is then combined with objective targeted quantitative factors in Alphinity’s proprietary Composite Research Model (CRM).

Fundamental Research

Fundamental research is heavily focused on gathering and analysing first-hand information with the ultimate aim of determining whether a company’s earnings growth is under or over-estimated by the market.  To assess this, it’s critical we understand the specific share price drivers and what the rest of the market expects the earnings to be.  We then compare this against our own perspective and outlook on the company.

To gather this research, interviewing company management and utilising industry contacts are an essential part of our activity.  We gather this information via several hundred company visits each year, across both Australia and globally.  Each of our analysts spends time out of the office getting a first-hand look at each business and evaluating the factors which impact them.

Quantitative Factors

Quantitative factors, on the other hand, provide a different objective in identifying companies where the market is under or over estimating earnings potential.  We use specific factors which have each been comprehensively tested with proven effectiveness in uncovering unexpected earnings growth.

These factors cover all areas of a company’s financial report, such as profit & loss, cashflow and balance sheet statements and can be broadly grouped into momentum and quality factors. The wide range of factors aims to bring valuable diversification to our research.

Composite Research Model

Whilst the ultimate investment decision is made by the portfolio managers, bringing these two complimentary sides of research together in our Composite Research Model (CRM) allows us to:

  • objectively compare companies both across and within sectors
  • facilitate and direct our research discussion within the team
  • provide strong buy and sell signals, and
  • construct and monitor portfolios

25256_Figure 2- Portfolio construction process_V2

Portfolio Construction

Portfolio construction is conducted by the portfolio managers taking into account both fundamental and quantitative research inputs. It is centred therefore on stocks with high CRM scores preferably achieved through scoring highly on both fundamental valuation appeal as well as the quantitative factors. Finding stocks that have strong appeal across both spectrums of research significantly increases the probability of finding earnings surprise stocks and therefore generating outperformance for our clients, however they are not considered in isolation. This ensures sensible portfolio diversification and pragmatic positioning to the current macro environment.

The chart below highlights the ‘ideal stock path’, in other words the types of stocks we want to make up the portfolio. We want to be fully invested where the probability of being right is the greatest. We constantly track individual stocks and the portfolio as a whole to ensure we are meeting that objective. We find over time that this provides the best outperformance for the lowest risk possible.

25256_Figure 4- Ideal stock path_v5