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Methodology

Our investment process

Most professional investors have in practice an investment horizon of only 3-12 months. Companies’ business strategies — and the information they provide to investors — are accordingly focused on delivering and evaluating short-term performance. This approach tends to overlook critical longer-term risk and value drivers, which are then systematically under-priced in the market. Our longer term investment horizon, and our in-depth research on structural global megatrends — and their widely varying company-specific impacts — allow us to exploit these information efficiencies for the benefit of our clients.

Companies must possess at least five key attributes to be selected for an IPCM investment strategy:

  • Strong financial fundamentals.
  • Exceptional strategic management and execution capabilities, which will allow them to exploit emerging new opportunities — and minimize the emerging risks.
  • A culture of adaptability, responsiveness, and continuous innovation.
  • Significant — and positive — exposure to the key sustainability-driven global megatrends which are re-shaping the competitive environment for companies.
  • Attractive valuations.

Our Investment Process consists of three distinct stages:

  1. Quantitative Phase
  2. Qualitative Phase
  3. Portfolio Construction Phase

Quantitative phase

This phase scans the initial investment universe to remove securities that do not hold up to our requirements in terms of financials and durability. It is intended to be selective and sift out the extremes, retaining only those securities with the best fundamentals both in terms of financial and ESG scores. This filter is based on two main pillars:

  • Financial: based on the proprietary financial scoring method developed by LFIP using 4 major criteria: Valuation, Growth, Momentum and Quality. Each security is given a Total Score, the average of these four criteria (equally weighted).
  • ESG: derived from the ESG ratings of external providers (mainly MSCI and Sustainalytics), reweighted by sectors. A total ESG score is calculated based on these data plus a ‘5-Factor Quantitative score’ based on IPCM’s selection of relevant ESG data.

These pillars are combined to give each security of the initial universe a quantitative score - the financial score being given a greater weighting at this point since it is based on criteria that are recognised and established by financial theory and the practices of portfolio managers.

Using the SAI approach, this phase aims at identifying stocks whose financial fundamentals are the most robust and to remove securities whose durability is the weakest. It allows our professionals to spend more time on the next stage i.e. the qualitative analysis of the most promising securities in the investment universe. The retained securities once this filter is applied constitutes the “Alpha Pool”.

Qualitative phase

Securities in the Alpha Pool are analysed in depth by factoring in different perspectives simultaneously: financial, ESG and strategic; it is a forward looking assessment.
The qualitative financial score represents the vision of the manager who assesses the quality of the consensus data, detects trends, accounts for market events (e.g. geopolitical crisis) or changes to the company’s ownership structure (e.g. M&A, capital increase). To formalize their opinion on stocks retained in the alpha pool, portfolio managers score companies by combining three angles: industry and competitive positioning, financial assumptions and valuation, stock-market status and momentum. 

The qualitative score includes:

  • The 5-factor score reflects a multi-facetted and integrated analysis. It is based on an analysis of alternative drivers of risks and returns adds more essential forward looking capabilities analysis, e.g. the company’s innovation capacity, adaptability and responsiveness, agility. We look out for strategic management as well as execution capabilities on those factors.
  • The Mega Trend score which analyses the exposure and positioning of the company to the global mega trend that are shaping our future.

The combination of these two scores results in a qualitative score for each security in the Alpha Pool. Only the highest rated securities make it to the Focus List.

Portfolio construction phase

The portfolio construction is the final step following the stock picking process and involves building a highly concentrated portfolio of approximately 50 stocks that reflect our high convictions, on the basis of an in-depth dialogue on stock level between our portfolio managers and analysts. Even though we compare performance to a benchmark defined together with the client for indicative purposes, our portfolio management style is not benchmark driven and allows for a high TE (in average between 6% and 8%) targeting a Sharpe ratio over 0.5. The global portfolio construction is a strictly disciplined, repeatable process with a focus on risk control.