Investment Philosophy and Process

Our core philosophy is that the purpose of equities investing is to generate positive risk adjusted returns.

Our belief is that a combination of solid research and an understanding of the persistent inefficiencies found in the Australian equities market will achieve this goal.

There are a number of behavioural biases that permeate the market. Our experience has shown that the market regularly experiences difficulty reconciling the degree to which fundamental information is already factored into security prices. We have also observed that the market can be slow in certain circumstances to reflect changing company’s fundamentals into its security price. Our process is therefore designed to focus on situations where these biases are most likely to exist; we are looking for situations where the market has incorrectly priced a company’s fundamentals.

This belief sees our investment process use an initial screening framework to highlight securities where there are likely to be errors in market expectations and where they could change to impact security prices. It is in these ‘breeding grounds’ of inefficiency where we have the most experience in generating excellent returns and therefore where we focus the majority of our research effort.

Our research process uses competitive strategy analysis integrated with financial analysis to determine a fair return on capital a company should be generating. We then compare this return on capital figure to that implied by the current security price. Where there is a material difference we ask ourselves two key questions:

• Why does this difference exist?
• What are the catalysts for it to close?

If we are able to provide salient answers to these two questions, we will consider investing. Furthermore, we must have a view on the timing of the catalyst for a favourable shift in expectations and at best see the early signs of adjustment. We would rather observe change than predict it.

Finally, we believe that a strong risk control framework is necessary. We are quick to change our mind if the facts change and our investment is case nullified. We believe that escalation of commitment is a common mistake in investment management and will prevent it through a transparent investment case that can be regularly stress tested by our Investment Committee. As a supporting measure, we have in place strict stop losses for all positions.

Our Investment Principles

Evergreen Capital Partners has five key investment principles:

1. Discipline: We follow a disciplined investment process that is based on a wide body of academic research and our own market experience.

2. Research: We are a research-driven organisation; our research process identifies market inefficiency at the security level.

3. Conviction: We take relatively concentrated positions because we think good ideas occur infrequently and - when discovered - should be exploited. We do not mirror a benchmark.

4. Risk Aware: As a counter to misplaced conviction, we focus heavily on risk control. We ensure our Fund is well diversified and highly liquid.

5. Self Aware: We are aware of the vast extent of behavioural biases and we are continuously re-assessing our own positions, assumptions and arguments. If we are wrong we will take action.

Find out more about our Australian Equities Return Fund.