Opportunity Identification

Investment ideas for the Funds are obtained from many sources including stockbrokers, journalists, other fund managers, corporate financiers, business associates, company announcements, press articles and journals.

We have commercial stockbroking relationships with over 20 firms and 80 individuals which enable us to access vast quantities of financial information and a large number of corporate transactions.

Research and Analysis

Although there are in excess of 1400 securities quoted on the ASX, very few meet our investment criteria. We will generally only invest in companies that we believe we can understand and hence assess both the potential risk and the inherent value.

There are seven broad fundamental criteria that we generally assess in analysing a company and hence its inherent risk.

• Management
• Business Model
• Operating History
• Industry Structure
• Financial Analysis
• Corporate Structure
• Major Risks

We label this analysis the Operational Risk Assessment ('ORA'). These factors often help to identify the most appropriate investment opportunities and are subsequently used to value the company.

Valuation

Our valuation process for long-term holdings is two-dimensional in that we calculate a base-case valuation and a low case valuation to provide a 'valuation range' for a potential investment. This valuation range gives us clear guidelines as to the stock prices at which we ought to be buying and selling the investment and the inherent price risk of the investment.

The techniques used to value companies will vary depending on the business model dynamics and the nature of the earnings stream. The techniques we use to value companies may include:

• Capitalisation analysis;
• Discounted cash flows;
• Return based calculations;
• Comparable valuation analysis.

Whilst we acknowledge the subjective nature of any valuation technique, the company valuation nonetheless plays an important part in our investment process.

Portfolio Construction

Long-term holdings are included in the portfolio at weights guided by a proprietary stock weighting matrix that incorporates our ORA, our base and low case valuations and the current market capitalisation of the investment.

We will hold cash whenever we are not be able to find compelling investment opportunities which meet our investment criteria.

We believe that this approach serves to manage risk by spreading investment risk over a range of sectors. Generally we believe that an acceptable degree of diversification can be achieved by owning securities in at least 25 companies.

Portfolio Maintenance

An ongoing process of research and evaluation is conducted on all long-term holdings in the Funds.

The Funds' holdings will be added to, reduced, or sold entirely as changes in a number of factors, such as our ORA assessment or market pricing, occur.

We take a pro-active approach to investments that do not perform to our expectations. When a business is found to be performing below our expectations, the investment is reconsidered and often sold.

Our investment process and strategy is non-exhaustive and represents a distillation of our detailed approach to stock investment. This is an evolving process and as investment managers we are constantly learning from the past and applying our new knowledge to future investment opportunities.

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