Our research analysts form the core of our research and analysis process. Their focus is to be industry experts (specialists) and understand our portfolio holdings inside-out. They continuously monitor our existing investments and identify new investment ideas through ongoing screens to compare the quality and value of our fund's holdings versus companies in the broader market.
Our analysts evaluate business quality first. They learn the business inside out by looking at the company’s historical and current operational and financial performance. They compare the company’s quality with that of its peers, and they conduct meetings with company management. Since we hold stocks for an average of four or five years, our analysts typically get to know management quite well thanks to these regular meetings. The longer we own companies, the better insights we gain on these companies.
The analysts look at the company’s historical profitability and determine the company’s absolute and relative fair value by assessing:
- Earnings sensitivity
- Multiple expansion potential
- Net asset value
Using all this information, our analysts fill out a detailed Investment Grade Rating Checklist resulting in an overall ranking of a company’s quality from 1 to 5. This grading system acts as a risk control mechanism limiting the portfolio manager’s maximum weighting in a given position. The maximum allowable weighting rises as the grade moves from a 5 (minimum acceptable quality) to a 1 (highest quality). We will not invest in any company with a grade greater than 5.
In order to communicate their conclusions to the portfolio manager, the analysts write a detailed research report which includes all their findings and a buy or sell recommendation.
In summary, our analysts:
- Gather multiple years of financial history and analyze it in detail.
- Examine the company’s business, its industry, and its business history.
- Interview management.
- Informally interview customers, suppliers and competitors whenever possible.
- Compare the company’s financial characteristics with those of its competitors.
- Obtain the Fixed Income team’s views on the company’s balance sheet strengths.
- Conduct a detailed scenario analysis to determine a stock price’s upside and downside.
- Complete a quality Investment Grade Checklist.
- Prepare a formal detailed research report.
Once an analyst makes a buy recommendation and reviews the analysis with the portfolio manager, FGP’s Investment Committee convenes. The committee, with representation from the Fixed Income team, the Canadian Equity team, and the Foreign Equity team, listens to the analyst make his or her case to add a new company to the portfolio. As the devil’s advocates, committee members ask the analyst detailed questions about his or her review to make sure no research stones have been left unturned. The committee can challenge the investment grade rating and can request that the research analyst conduct additional due diligence. While the portfolio manager uses the committee’s feedback to help him evaluate the worthiness of the company, he has the final say on which companies enter the portfolios.