Think about our risk framework in the same way as a plane before take off - if you have a structured detailed checklist, you make sure that you check all the areas at the check in
Research is at the heart of our investment process. I describe it as the engine of our investment process. And we focus on fundamental research as core expertise. Ultimately, valuation of course is at the heart of our fundamental analysis, and we're looking for companies that are attractively valued and that have got strong structural growth prospects and high returns potential.
As part of our analysis we focus on a systematic risk assessment on each company that we analyse across four verticals; Industry risk, Company risks, ESG risks, which is our proprietary governance and sustainability risk assessment, and portfolio risks.
The latter one is worth highlighting, in so much that already at the fundamental research stage we're already thinking about the impact that stock could have on the risk profile of the portfolio, should we look at adding it.
On the industry risks, there are various parameters we look at; Barriers to entry, competitive intensity are two of them. Pricing power, because we like companies with strong pricing power. We also look at supply chain dependency risk. And that might be one that's more difficult to understand, but ultimately it's about making sure that when we're looking at a company, we look at the whole supply chain risk to ensure that we're not getting ourselves into some risks upstream or downstream. It was a particularly useful framework to have during the pandemic crisis when supply chains were getting disrupted. We were able to straight away assess which companies we were rating as high supply chain risk and go and do some extra work on those.
We want companies that have got low disruption risk and companies that are able to sustain their innovative rate to ensure they're either staying leaders in their space.
On the company risk side there are various aspects we look at, whether it's regulatory risk, balance, sheet risk, accounting risks, which I mentioned earlier, but also aspects such as tax rate, effects exposure, and importantly, we focus on companies disruption risk and innovation potential. We want companies that have got low disruption risk and companies that are able to sustain their innovative rate to ensure they're either staying leaders in their space or becoming leaders if it's a new market potential.
By having such structure to our risk assessment, we are able to look at every important risk that any given company would bring to the portfolio and that systematic risk assessment ensures that we do not have any unintended risk exposures in the portfolio.
Think about our risk framework in the same way as a plane before takeoff - if you have a structured detailed checklist, you make sure that you check all the areas at the check in.
As Warren Buffett once said, risk comes from not knowing what you are doing. That is a risk that we want to eliminate by having that consistent framework in place.
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