Investment approach

ARCO Investment Management’s investment team has aggregate experience in the Australian equity market of over 90 years, with disparate yet complementary skills covering fundamental research, trading, execution and risk management.

We believe that a meaningful and constant combination of all these strengths is critical in delivering consistent performance to investors over time.

 

Investment Strategy

ARCO Investment Management has a fundamental research approach to stock selection for clients, constructing and actively managing portfolios of listed equity securities that we believe are priced at levels that do not adequately reflect their underlying value.

We are fundamentally driven investors, and believe that alpha-generation is hard work, requiring a deep insight into industry sectors and underlying companies, a willingness to assume out-of-consensus risk based on that work, and a flexible mind-set.

We view the equity market in Australia as highly efficient. As such, we believe that most high-liquidity, large-capitalisation stocks have an identifiable ‘fair value’ range, based on their comparative advantage to peers, growth rate, capital structure and allied fundamental considerations.

Our process is to combine intensive fundamental research with active consideration of non-fundamental factors, and is particularly interested in stock price variances from our calculated fair value range, whether below our fair value range for a stock or above it. We make it our business to find out why such variances are occurring, at both the fundamental (e.g. earnings, industry, or peer valuation dynamics) and market (typically liquidity or sponsorship changes) levels.

 

Risk Management

Achieving our objective of delivering investors positive, risk-adjusted returns that compound higher over time along with an over-arching focus on capital preservation requires not only constant fundamental analysis but also a clear and disciplined risk management framework.

Across our investment strategies, ARCO employs and strictly adheres to clear risk parametres that consider among other things, the following:

  • only those stocks that fall into our investable universe, (and not to be distracted by those that do not)
  • stock concentration limits – to ensure that investors are not over-exposed to any one particular stock within the fund
  • hard stop-loss (sell) limits that ensure we exit or reduce stock positions that have lost value at a point that will erode overall portfolio returns
  • active rebalancing of stock positions as its price moves higher/lower relative to our fair value range for the stock

The Absolute Trust may also use Index Futures contracts (derivatives) to hedge market risk, if ARCO consider it appropriate, to protect investors from the possibility of stock price declines.

Further, the fund’s level of net equity risk exposure (defined as long market value less short market value) is governed by its assessment of market and macroeconomic risks, and systemic shock factors. Under its Trust Deed, the fund has the capacity to have 60% of net assets invested net long or net short, if ARCO believes that market conditions warrant such a strategy. In practice, since inception, the fund has ranged from net asset exposure of between -20% to +30%, with an average of +7%.

The Benchmark Independent Fund may increase the cash weighting in the portfolio to no more than 20% of the Net Asset Value, if the Portfolio Managers consider it appropriate, to protect investors from the possibility of stock price declines.

Further details regarding the risk management approach used by ARCO to deliver on its investment objectives for investors can be reviewed in the offer documentation for ARCO’s investment strategies.