Stage 1 of our process is an assessment of the attributes of each business. This filter is known internally as Q-Stocks and involves 18 subjective tests. Stocks are scored in each category and ranked. This process provides a quality ranking that highlights both the strengths and the weaknesses of each business. We believe that the attributes of above average businesses are readily identifiable and that investing in these businesses early will deliver wealth accumulation for our clients.
There are three broad parts to our Quality Assessment ranking comprising 18 tests:
The quality assessment is a subjective exercise conducted by the five members of our investment team. Information gained from our extensive company visit program is critical to the process. The Q-Stocks process ranks each business into grades from “A” through to “D”. The A grade stocks will display a much higher frequency of attributes that we seek than the poorer D grade stocks.
There are 18 sub-tests within the above three categories and each is scored from one to six. Stocks are reviewed post an event such as annual or half yearly results, after a company visit or after gathering further relevant information. Stocks rated as A have the greatest potential to sustain above average returns on capital employed for extended periods. We consider A grade stocks tend to be rare and valuable. B grade stocks are somewhat more plentiful. Most stocks available are C grade. We will not invest in D ranking stocks.
Management is crucial to our analysis. The Quest company visit program is a key element of the process and we believe a competitive advantage. Our ability to conduct informed discussion with company management is critical. We are looking for particular attributes in relation to business understanding, experience, strategy, innovation and integrity.
The assessment of Business Sustainability will include understanding the business value proposition, the point of differentiation of the product or service, the potential for price erosion, an assessment of current and potential competition and the cost base of the business.
Financial Return focuses on the return on capital invested in the business, the visibility and predictability of earnings in the future and the ability of the company to sustain or improve returns over time.
The output of this stage is understanding the attractiveness and risks associated with each business.