Portfolio construction and risk
Once the mandate is set, we decide what earns a place in the portfolio, how large a position should be and when the investment case has changed. Macroeconomic research, fundamental investment work, valuation, liquidity, concentration and downside all feed into those decisions.
Research has to end in a portfolio decision
Macroeconomic research, security selection and asset allocation inform one another. We use them to assess the environment around the portfolio, individual investments and the alternatives available elsewhere within the mandate.
Macroeconomic conditions
We monitor economic, financial-market and liquidity conditions across major regions. Our macroeconomic work and proprietary models help us assess the environment in which the portfolio is operating, where risks may be building and how much confidence to place in a particular view. Models are inputs to the work. The investment team makes the decision.
Fundamental research
We conduct our own research across Australian and global equities, managed funds, ETFs and other investments relevant to our mandates. For direct equities, that includes financial analysis, valuation, company research and ongoing review of the investment case. For funds and ETFs, we assess the underlying exposure, investment process, portfolio, risks and the role the investment could play within the broader allocation.
Competing for capital
Every investment competes with what we already own and the opportunities available elsewhere within the mandate. We consider the return we expect, the risk we would be taking and whether the investment remains a good use of the portfolio’s capital relative to the alternatives.
Risk is part of the investment decision
Forecasts will sometimes be wrong. Investment theses will fail. Markets can also move faster than expected. We try to reflect those possibilities when we build the portfolio, before they become a problem under stress.
Position sizing
The size of a position reflects the strength of the investment case and the consequences if that case proves wrong. Higher conviction can support a larger position, but concentration also increases the cost of being wrong. The position has to make sense on both sides of that equation.
Dependence on one view
A strong macroeconomic or market view can affect the way we position a portfolio. We still look at how dependent the overall result would become on that view being correct. One forecast should not carry more of the portfolio than the evidence justifies.
Liquidity
We consider how readily a position can be adjusted and what that liquidity might look like if market conditions deteriorate. That affects both what we are prepared to own and how much of it we are prepared to hold.
Valuation
The quality of an investment and the price paid for it are separate questions. As valuation changes, so do the expected return and the amount of risk we are being asked to accept.
Mandate limits
Every portfolio decision remains subject to the agreed investment universe, risk limits, allocation ranges and other constraints in the mandate. Conviction does not override those boundaries.
When the investment case changes, we reassess the position
A portfolio reflects our current assessment of the evidence. We keep testing that assessment after an investment is made. The original investment thesis is a starting point for ongoing review, rather than a reason to defend a position after the evidence has changed.
While the case holds
We hold a position while the case for owning it remains intact. New information can strengthen that case, weaken it or change the range of outcomes we think is plausible.
What can change a decision
The underlying business or investment does not have to deteriorate for the portfolio decision to change. A move in valuation, a different balance of risks or a better opportunity elsewhere can change whether the position still earns its place.
Acting on it
When our assessment changes, the portfolio can change with it. Depending on the circumstances, that may mean adjusting the size of a position, changing an allocation or exiting the investment.
Important decisions should still make sense after the outcome is known
Investment judgement cannot be reduced to a checklist. We still want the team to be able to revisit why an important decision was made, which assumptions mattered and what changed afterwards.
Preserving the reasoning
Where appropriate, our research and portfolio work preserve enough of the reasoning to revisit the original decision. The level of documentation depends on the decision and the mandate. The aim is to retain the important reasoning without creating paperwork around every judgement.
Key-person risk
A small investment firm carries key-person risk. The underlying research is shared across the investment team and important decisions are documented. That means the reasoning behind a live position can be revisited without relying on one person’s memory.
We expect portfolios to carry risk. The work is to decide which risks are worth taking, size them deliberately and keep an individual mistake from permanently impairing the portfolio.
Tell us what the portfolio has to do
If you want to understand how we would build and manage a portfolio to your objective, that conversation is the place to start.
- Telephone
- +61 2 9696 8163
- Office
- Level 2, 44 Bridge Street
Sydney NSW 2000