Our investment process seeks to take account of the significant variables that influence a company’s prospects. Whether these variables be financial, strategic, reputational or have any other feature, our process tracks the most material ones.
When we consider making an investment for Edinburgh’s portfolio, we take a holistic bottom-up approach to assessing the company in question, and combine this with a macroeconomic overlay. From a bottom-up perspective we examine company specific opportunities (such as new products, margin enhancement activities, M&A opportunities), and company specific risks such as the risk of technological obsolescence, the need to restructure an underperforming division, or poor employee engagement leading to high levels of churn and resultant loss of customers. This bottom-up rigorous assessment is then combined with a macroeconomic overlay to inform position sizing, and the structure of the portfolio. This overlay includes an assessment of the economic and market cycles, and also longer-term risks and opportunities that could impact companies. We focus on materiality – what matters for the companies in the portfolio. These material risks and opportunities are both bottom-up and top-down and may include more ESG oriented risks and opportunities. Top-down risks and opportunities we consider for the portfolio include:
- The evolution in the global geopolitical environment and how this might impact companies with significant operations in China – these are governance and capital allocation topics of consideration, alongside growth and supply chain topics;
- The growing commitments to increased defence spending globally – a social topic of consideration, alongside a growth topic;
- The global need to reduce emissions and for companies to decarbonise – an environment topic of consideration, alongside a new product development and growth topic;
- The ability for companies to pass through cost inflation – a pricing power topic, as well as mitigate cost inflation particularly in labour intensive businesses (a social consideration)
We then combine our macro-economic overlay alongside our bottom-up holistic assessment to pinpoint where we believe the best medium to long term risk adjusted return opportunities are for the portfolio. These material opportunities and risks may or may not include specific ESG factors for the company in question. For example, on cost inflation, this may be a material social issue for a company which is particularly labour intensive, and for another company it may be a material pricing power opportunity, or margin risk. The analysis differs for each company: it is nuanced and focuses on the material specific exposures that each company faces. To help us incorporate this analysis, we assign a Resiliency score, using a descending 1-5 scale, based on how well a holding is managing its key exposures. We also assign conviction scores, again on a 1-5 scale, which reflect the team’s conviction in owning a stock. Portfolio weightings are also determined to some extent by conviction scores and changes in these over time.