Dalton Nicol Reid Mandates PORTFOLIO MANDATES
INVESTMENT PHILOSOPHY
Dalton Nicol Reid believes in investing in quality assets at sensible prices, then deriving the benefit from holding these assets over the medium-term. Dalton Nicol Reid believes that patient capital will prosper. Quality assets should exhibit superior growth and return on capital and thus outperform as the market ascribes them a premium. The firm's founders manage their personal wealth alongside that of their clients. This engenders a commitment to sustainable, risk controlled performance over time rather than variable short-term index driven returns.
INVESTMENT PROCESS – AUSTRALIAN EQUITIES
The investment process uses a combination of ‘bottom up' stock selection with a ‘top down' overlay.
Bottom up: Stock selection is driven by a bottom up or company specific analysis. Dalton Nicol Reid has developed a proprietary earnings model that measures the investment fundamentals of each company in the S&P/ASX 200 and a few smaller stocks. This model captures historical and forecast (+2 years) data for key P&L, Balance Sheet and cash-flow metrics and calculates measures used in stock level analysis including dividend yield, earnings growth, price to earnings growth (PEG), price to earnings (PE) and changes in earnings.
The Earnings Model is used to both screen the investible universe and to provide key valuation metrics in the evaluation of stocks. The three criteria that Dalton Nicol Reid assesses when evaluating a company are:
1. Quality business with strong management: Includes an assessment of the market position of company, industry structure, competitive environment, achieved and potential return on capital generated by management team. SWOT and Porter analyses are typically included in company evaluations.
2. Strong Balance Sheet: This is a risk minimisation strategy and includes evaluating the debt to equity levels and interest cover (EBIT/Net interest expense).
3. Strong earnings growth at reasonable prices: Dalton Nicol Reid prefers to buy quality assets at sensible prices than poor assets at ‘bargain' prices. The single most important driver of value is earnings; as a consequence the Investment Team evaluates the sustainability and growth in earnings and whether the share price captures this growth. Depending on the nature of the company a discounted free cash flow model may be constructed for valuation and sensitivity testing.
The Dalton Nicol Reid portfolios are concentrated (less than 30 stocks) and to maintain the discipline of a small (in stock numbers) portfolio there is a philosophy to ‘water the flowers and cut the weeds'. That is, those stocks that continue to meet the above criteria are held for the long-term; those that have earnings difficulties or a structural deterioration in their business are sold quickly.
Dalton Nicol Reid's Investment Committee reviews all stocks and keeps the focus on this sell discipline.
Top down: The portfolio manager follows a range of economic indicators that are reviewed regularly, including formally, at the monthly Investment Committee meeting.
These measures are used to formulate an economic overview which provides a backdrop to investment decision making and influences Portfolio construction. For example, the economic overview may encourage the Portfolio Manager to tilt toward defensive stocks or minimise exposure to companies with a high proportion of USD earnings.
The indicators that are followed include (for Australia and the US): Bond and earnings yield differentials, 10 year bond yield trends, yield curve, the Reuters/Jefferies CRB Index, Market PE ratios over time, earnings upgrades, $A trends.
INVESTMENT PROCESS— Listed Property Trusts
Dalton Nicol Reid aims to create wealth over the medium-to-long term by adopting an active but disciplined approach to buying quality assets.
The investment process uses a combination of ‘bottom up' stock selection with a ‘top down' overlay influencing construction.
Bottom up: In carrying out LPT specific research there are some key criteria that are sought. Dalton Nicol Reid has a strong preference for high quality LPTs and look for the following:
- Low to medium debt levels. While Dalton Nicol Reid prefers a well managed balance sheet, we seek to avoid LPTs that need to keep raising equity due to their overstretched debt position.
- High quality management with strong track records of delivering asset and share price performance.
- A stable portfolio investment strategy. A changing asset mix can be a signal of problems or poor management.
- High yield is obviously attractive but the portfolio manager also looks for LPTs that have a history of distribution growth.
Top down: The portfolio manager follows a range of economic indicators that are reviewed regularly, and uses these measures to formulate an economic overview which provides a backdrop to investment decision making and influences portfolio construction.
For more information about Dalton Nicol Reid, read their information brochure.
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