Investment Philosophy and Process

At Wealth Growth Investment Management, our aim is to maximise long term wealth for our clients by purchasing companies trading at the largest discount to their long term intrinsic value. In some portfolios, we combine this with a macro-economic view to protect clients wealth before recessionary periods, and ideally purchase these same strong companies near or at the bottom of recessionary downturn periods, when prices are low to generate higher returns and greater wealth for clients. In some portfolios, we look to generate wealth during these recessionary periods. We believe that clients should not have to experience panic, fear, and financial loss during recession downturns, as this is easily avoidable.

Our risk-averse investment philosophy is to calculate both the present intrinsic value of a company and the long term intrinsic value of a company and to invest in companies with the largest discount. We take a 5-10 year view and continually research companies for the largest discount as this is how we believe we will maximise profits. When constructing portfolios, we combine bottom up investing, which focuses on company aspects, with top down investing, which focuses on the macro-environment, as the combination ultimately affects share prices and will generate higher returns for clients.

In determining intrinsic value we focus our research on many factors including sector fundamentals, strength and weaknesses of company fundamentals, as well as risk factors surrounding these companies. We believe by being risk-averse and investing in strong companies with low risk factors, we will yield superior returns in the long term.

Please see below example:

We would look to purchase Company A as it has the largest discount.

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We believe that in the short term the stock market reacts to many aspects including sentiments such as fear and greed, to which people such as technical and short term traders react. However, in the long term, share prices will return to true intrinsic value. As sentiment dominates the stock market in the short term, there are times when the share price of a company, with a weak intrinsic value, may outperform a company with a strong intrinsic value. When this occurs, we would rather under-perform as we feel those shares are higher than their intrinsic value and when this occurs there is a very high risk of capital loss and we are not prepared to take that risk as the short term reward is not worth the long term capital loss. When share prices normalise, the share price of the company with a weak intrinsic value will lose value and the company with a strong intrinsic value will outperform.

Please see below example for further explanation:

graph

The graph above shows the share prices of Company C, with strong fundamentals and Company D with weak fundamentals. The vertical axis shows the share price in units, the horizontal axis shows the time in months. At inception both companies had a share price of 100 units. As time progresses from inception to month 36, Company C with strong fundamentals, outperforms Company D with weak fundamentals, then due to sentiment between month 36 to month 48 Company D outperforms Company C. However, when true value in Company C is realised, Company C outperforms Company D from month 48 to month 60. The overall outperformance from inception to month 60 in Company C is a capital gain and in Company D is a capital loss. We would rather hold Company C in the long term even though Company D outperformed Company C between month 36 to month 48 as Company C is stronger and will provide a long term capital gain – whereas Company D will provide a long term capital loss. This is why we believe a long term view is more accurate than a short term view.

It is important for investors to buy into an investment philosophy, and understand the advantages and disadvantages, as it is almost impossible to beat benchmarks every year and hence we believe that the investor should focus on the long-term, preferably a full business cycle.

We will address the Institutional portfolio’s separately to the rest of the portfolio’s.

Institutional Portfolio’s (excluding South Africa): 

Our bottom-up approach:

Advantages of this investment philosophy:

The investment philosophy is repeatable as we use between 20-40 financial formulas to assess the strength of the capital structure (assets/liabilities and equity), in comparison to the earnings and earnings growth, the lower the risk, the more attracted to the company we are, as we believe in the long term these types of companies are superior and they yield high returns with temporary low downside volatility through the full business cycle. We are low churners of institutional portfolios, typically every 2-3 years, as we need the companies to show their strength in returns, and for this we need time.

Growth in portfolio price: Given enough time, typically a full business cycle, we believe that we will outperform our benchmarks significantly. Our strength lies in the bull market cycle and this is generally where we show significant outperformance.

Disadvantages of this investment philosophy:

Our disadvantage is that we will tend to underperform in down markets as companies that perform well in bull markets may underperform in bear markets, however long term, stock markets are bull markets, and this is why we need to not worry about the downside but instead focus on the upside growth in the eventual long-term bull markets.

For the rest of our portfolios, we apply a combination of a bottom-up and top-down approach.

Advantages of this investment philosophy:

Downside volatility tends to be lower than the standard bottom-up approach as discussed above in the Institutional Portfolio (excluding South Africa) approach, as we combine the philosophy with a top-down approach to observe periods of where an economic downturn will occur, and take protective measures. Therefore if we anticipate cycle turns correctly, we will be able to protect clients wealth before the down-turn in markets, and grow clients wealth significantly in bull markets.

Disadvantages of this investment philosophy:

Macro-economic indicators are relatively accurate, however not 100% accurate, so there are times where some macro-economic indicators do not perform in a way that we anticipate and we may underperform for this reason, however in the long run cycles tend to repeat and this is why we believe that we can lower downside volatility, but as we are more focused on downside volatility and capital protection, we may lose upside growth if the cycles to not occur in the way that we had anticipated.

In closing, a combination of protecting clients wealth before recessionary periods and purchasing strong or strengthening businesses, at low prices, especially during market downturns and recessionary periods, will generate safe, superior returns and ultimately superior wealth for our clients.