Today we're going to talk about portfolio construction.
Just at the onset, we wanted to highlight that portfolio construction, for us, is just as important as the screening i.e. idea generation and the fundamental research which constitute step one and step two of our investment process.
Why? Well portfolio construction (which is step three of our process) ensures that we have portfolios that are high conviction, concentrated but diversified at the same time - and to ensure that there is no unintended risk exposures.
We've talked about the fact that we have a consistent approach to assessing risks across four verticals in our fundamental research work: industry risks, company risks, ESG risks and portfolio risks. We do that across all companies that we research.
As a result of that, we're able to capture that risk assessment into our portfolio construction - again with the aim of ensuring that there are no unintended risk exposures in the portfolios, despite the fact that they are high conviction and concentrated.
We have put in place a wide array of fundamental data analytics, which are proprietary, which enable us to have a more accurate assessment of portfolio exposures (based on that fundamental data) and therefore enable us to aim for more accurate diversification and risk management as part of that portfolio construction assessment.
That data is varied. We are able to assess our portfolios by thematic exposures and geographic exposure of revenues and profits at each company are investing generates.
It's very important to get a very detailed, in-depth understanding of partial exposures based on that fundamental knowledge of each company that we gather at the research process.
But also end user market exposure, which again is very important, because we could be thinking that we have no exposure to a sector, but actually, in terms of end user market exposures, some of the companies we hold do have exposure to those sectors.
So, it's very important to get a very detailed, in-depth understanding of partial exposures based on that fundamental knowledge of each company that we gather at the research process.
On the thematic front, we have talked about our thematic framework to ensure that we think long term in order to capture structural, attractive growth opportunities.
Well, that thematic framework also enables us to understand how the portfolio is exposed to the various themes within the megatrends that we have highlighted. It permits us to also direct the research where we might need to do more work and ultimately also helps us assess diversification to ensure that the portfolios are not just exposed to one or two specific themes.
All in all, portfolio construction is very important, even if we are stock pickers, because it helps us manage risk, achieve diversification in high-conviction, concentrated portfolios, and ensures that we are able to understand the risk exposures across the whole spectrum of the fundamental data analytics that we have put in place.
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