An important step in our investment process is assessing business quality.
The first stage of our process is an assessment of the attributes of each stock. This filter is known internally as Q-Stocks and involves 18 tests that we have developed over nearly two decades. Stocks are scored in each category from 1 to 6 and ranked. We consider that 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 an accumulation of wealth for our clients.
There are three parts to our Quality Assessment framework:
The quality assessment is a subjective exercise conducted by our 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 higher frequency of attributes that we seek than the poorer D grade stocks. The process covers over 300 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 post any other event that may be relevant. The A grade stocks have the greatest potential to sustain above average returns on capital employed for extended periods. Regrettably there are limited numbers of A grade stocks while B grade stocks are more plentiful. Most stocks are C grade while D ranking stocks are not considered investable.
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 the return on capital.
Management is crucial to our analysis. The Quest company visit program is a key element of the process and we believe a competitive advantage.