The FGP Investment Committee is responsible for establishing the risk management guidelines for each model portfolio. The lead portfolio manager must construct the portfolio while abiding by these guidelines. FGP’s compliance team is responsible for monitoring and enforcing the risk management guidelines.
We define risk as the permanent loss of capital. There are three specific risks we try to control:
We seek to buy stocks at a big discount to build in an extra margin of safety.
Balance sheet risk
We seek to buy well capitalized companies rather than highly leveraged companies.
We buy companies for which we understand the specific factors that make earnings rise and fall.
There are a number of ways we manage these three risks:
Diversification guidelines from the Investment Policy Statement
Each Investment Policy Statement specifies various diversification guidelines, including:
- The minimum number of sectors in which the portfolio must be invested.
- Market capitalization ranges.
- The minimum and maximum number of stocks in which the portfolio must be invested.
- The maximum investment in any one security as a percentage of the portfolio’s market value and as a percentage of the company’s market capitalization.
We endeavour to project future profitability by building multi-year forecasts for each company and testing these forecasts with various scenarios such as higher/lower sales and higher/lower input costs. Our analysts update these models when quarterly earnings results are announced and at other times if necessary. This scenario analysis provides us with a good range of estimated price targets.
Investment Grade Rating
As part of their research on a given company, our analysts fill out a detailed Investment Grade Checklist. The end result is an overall ranking of a company’s quality from 1 to 5. This grading system acts as a risk control mechanism that limits 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).