There are countless theories about the best way for investors to beat the market. Troy Angus, Head of Large Caps at Paradice Investment Management, has been able to consistently beat the market for over a decade and believes he has identified four key criteria that consistently lead to outperformance.
He says when pulling together a portfolio of companies these ingredients now form the pillars of his stock selection process. Angus says;
The first key ingredient is a better balance sheet. Effectively, we want less gearing for the companies that we invest in and thus, for the aggregate portfolio relative to the market.
In this short video Angus outlines the three other ingredients that when combined lead to outperformance.
At Paradice we’re looking for four key criteria when we're aggregating thirty odd stocks into building a portfolio.
The balance sheet matters
The first key ingredient is a better balance sheet. We want less gearing effectively for the companies that we invest in and thus, for the aggregate portfolio relative to the market.
We want better earnings growth potential in the underlying businesses that we own relative to the market.
Cash is king
We want better cash flow characteristics, i.e. the underlying assets that the businesses own actually generate more cash relative to the market.
A lower valuation
We also want a lower valuation. So we want the starting point, i.e., the multiples, whether it's price to earnings (PE) or whatever, price to earnings ratio, to be somewhat cheap relative to the market.
Over time, we found that when you get those four key criteria right, you get outperformance.
We're very conscious about risk but our job is to take risk to generate the returns, to make the rewards. You'll find that over time, our concentration can wax and wane. Sometimes, the portfolio is more concentrated or less concentrated than other times.
Right now, we see particularly significant opportunities in a couple of key sectors, which we've touched on, energy and materials. Our concentration in those sectors, some of which include very big names with the likes of BHP right now is very high, so absolutely, we're concentrated in some key sectors but that's where we think the upside is and that's why we're here.
The role of top down analysis
Macro or top down helps inform the view. It's not the be-all and end-all necessarily of how the portfolio is positioned because we're still very much bottom-up stock pickers. So we're most interested in the stock specific details of the particular companies that we're investing in.
However, you can't ignore the overarching macro backdrop particularly for the likes of commodity companies where a lot of those commodity prices are very economically sensitive. The upshot is when we see opportunity, when we see a supportive economic backdrop, then we will go for where we perceive the most upside to be in some of those economically sensitive names.
Equally, the reverse can be true. Where the macro backdrop is not supportive, then we'll pare back the risk in the fund and get more defensive. That's how we use macro from a top-down perspective.
For more information about the Paradice Australian Large Cap Fund please visit our website.
Paradice Investment Management, Australia's first boutique firm specialising in smaller companies, was founded in 1999. It is privately owned with a team of 34 people, including 18 investment specialists, who manage over $15 billion in AUM.