ÆON's review of the Investment Process begins with understanding the philosophy and underlying decision-making process, and how/what securities are bought or sold in the portfolio. We want to identify who is making those decisions, and make sure that the process has been in place consistently throughout the period of the track record.
The philosophy should set out the manager’s view about the security pricing mechanism and how mispricing can occur. It should then set out the manager’s competitive advantage in exploiting those situations and how that can generate alpha on a repeatable basis.
ÆON generally prefer processes where the key investment professionals decide on the main risk exposures as opposed to a consensus team model. Exceptions do exist where successful teams include seasoned investment professionals who have worked together over a long period of time. These managers are aware of each other’s biases and as a result can challenge each other effectively. ÆON prefer investment processes that are structured and comprehensive but do not involve a series of complex steps or excessive bureaucracy. Ultimately, ÆON insists whatever the strategy it must be in line with your chosen risk profile.
ÆON believe there are essentially three critical pieces to any investment research process. The first piece is assessing the information a manager gathers to make their investment decisions. We analyse the quality and depth of this information compared to other investment managers.
The second piece is the judgment that a manager uses in making investment decisions. It is possible an investment manager may have identical information to others, but he/she may be able to focus on the important information more easily, or create an investment idea from the information that others may not see. The final piece is the manager’s process, discipline and guidelines. This is often the way position size is determined, the process of building positions and the sell discipline. This helps ensure that the process is repeatable.
Portfolio Construction is a critical component of the management process. We request historical holdings to ensure that managers have met their stated requirements. We are also not afraid of concentration, and differences from a stated benchmark. We pay managers to beat their benchmarks and therefore we should give the manager flexibility to meet that goal. Sell discipline should be an important part of every manager’s process, and we pay particular attention to how companies are sold from the portfolio. We review the manager’s criteria for sales, and then past decisions they have made. We appreciate managers who recognise liquidity of assets as a key element of risk and portfolio construction rules. We are looking for consistency and accountability for these decisions. ÆON demands highly liquid, transparent and dynamic asset management at all levels.