We like to choose companies with business models that are easy to understand. We must be able to identify the critical elements of how a company generates its revenue. The more complex the model, the more risk involved.
The industry in which a company operates is also highly important. A company is more likely to be able to increase its profit if it is in a growth industry , and the management are able to grow market share and maintain or improve operational efficiencies.
Competitive advantages – which stocks to buy
A strong sustainable competitive advantage within that industry is another key factor we analyse when choosing companies and shares. Such advantages include:
- a strong brand
- patent protection
- cost of production, and others
The profits and profitability of a company are driven by the management of that company, and having a solid management with strong governance and operating with transparency and integrity is vital. Businesses in which the management team have a significant ownership are likely to have their goals closely aligned with those of the investor, and therefore have the most potential to deliver a high return on equity.
Together with the quantitative measures, our fund managers assess individual companies and make investment decisions. In addition to using these considerations when putting together portfolios, their thoughts on these companies are published in the reports included in the MyClime product, which everyone can access.