INVESTMENT PHILOSOPHY

Top Down approach

AC develops themes about the market from analysing the global drivers that greatly affect individual share prices that have very little to do with the individual companies themselves. For example, all major banks in Australia have performed well for decades because the political will is to ensure our local banking system is strong. The impact of industrialising China, and more recently the global financial crisis, have likewise had profound effects on particular sectors in the economy. Understanding these top down influences is both a challenge and an opportunity. For example, after some years of high currency the winding down of the mining boom and pressure on government revenues is likely to see the currency gradually weaken, potentially benefiting some sectors and weakening others.

Bottom-up Fundamental Approach to Stock Selection

AC also takes a stock-specific, bottom-up approach to investment selection and does not have a particular style bias. In order to maximise the number of potential investment opportunities the investment universe includes all securities listed, or about to be listed on the Australian Stock Exchange (ASX).

About 70% of investment is directed towards ASX 200 companies, with ASX top 50 companies featuring heavily because of the ability to change positions quickly or use derivative or warrant overlays.

AC's bottom-up approach is overlayed with a strong risk management process which takes into account macro themes and other issues impacting, or likely to influence markets.

Long-Term Investment Focus

AC's preferred investments have the ability to grow earnings or asset values for some years to come, so that even if share markets deteriorate, valuation will eventually prevail.

Residual Cash Holdings

AC's flexible investment mandate extends to the portfolios cash holding, with cash being held until suitably attractive investments are discovered and purchased. There is therefore no specific cash weighting. Investments are made when the reward/risk equation is compelling. As such a portfolio's cash weighting may vary significantly over time, depending upon the number of suitably attractive investment opportunities available and the perceived level of market risk.

Autocratic decision-making

Research into the relationship between investment performance and size of investment team demonstrates, with few exceptions, a strong inverse correlation between the two. In other words, the more internal people helping an investment manager make decisions the more likely it is that performance will suffer. Large investment groups tend to suffer from the problem of what John Maynard Keynes dubbed the "institutional imperative". It's what leads insurance groups all around the world to invariably have their highest proportional exposure to equities at the top of bull markets and their lowest at the bottom (as in 2007 and 2009, 1987 and 2003, 1973 and 1979, 1929 and 1933). The investment decision-making process becomes polluted by the needs of corporate boards, compliance, marketing and trainee research executives that lead inevitably to sub-optimal or sometimes catastrophic asset allocation investment decisions (although perfectly satisfying corporate governance at the time).

In Australia, research evidences that the most likely investment structure to deliver performance is an autocratic one - a highly experienced investment manager with a strong research background (or a small team each with personal responsibility for managing money) who then ruthlessly seek out the best investment ideas from external experts they trust (yes including stockbrokers!) and filter these ideas rather than relying purely on internal researchers or an investment committee meeting periodically.

In Australia as well as elsewhere, the success of boutique investment managers reflects this and the public's recognition. In the USA, Warren Buffett is the world's most successful boutique manager.

Don't get too obsessed with the daily market action

As a generic observation, because stockbrokers are absorbed minute by minute with daily market action they risk losing focus on the strategic intent of a portfolio. Portfolio managers tend to be more strategically oriented, although DMA has blurred the boundaries.

Experience suggests there are benefits in being able to emotionally distance oneself periodically from the marketplace. Geographical distance can help with this emotional distancing. Warren Buffett is based in Omaha Nebraska, just about as far away from the financial capital as is possible in the USA. That has clearly worked for him for several decades. AC is now based in St Huberts Island, under two hours from Sydney. Given modern technology, the same or even better systems are available at the touch of a keyboard.