Phoenix believes that over the long term, superior investment performance can be achieved through investing in well-managed, shareholder-focused companies that are trading at a discount to their underlying intrinsic value.
Fundamental analysis focuses on ‘bottom-up’ research to fully understand the key factors that have driven historic performance and to enable informed forecasts to be made of future earnings and cash generation. This analysis culminates in a valuation based on cash flows discounted back into today’s dollars.
Phoenix has placed a self-imposed cap on its funds under management in order to facilitate a wider universe of investment opportunities, including small cap stocks. Small cap stocks are typically under-researched and consequently inefficiently priced. Therefore, this expanded universe not only provides more choice, but often presents the best opportunities and is likely to result in a skew towards small cap stocks over time.
2. Long-term valuation models
Detailed valuation models are built for every security in the investment universe. These models capture and analyse historical financial information and are used to make forecasts of future business outcomes.
Phoenix adopts a long-term investment horizon and the focus of valuation models is on the assumptions that drive ‘mid-cycle’ outcomes. This process seeks to adjust for currently under-performing divisions if they are considered to be caused by temporary conditions, or alternatively, may apply a negative adjustment where conditions are considered to be unusually buoyant.
These forecasts are used to calculate the fair value of each security. Today’s prices are compared to these fair value estimates and the derived signal forms the basis of the team’s investment decisions.
Sum of the parts / Break-up
To add further dimension to the research process, Phoenix also uses a ‘Sum of the parts’ valuation technique. This serves as a cross-check to the long-term valuation models described above, and as a shorter-term tool, can be more suitable under certain business conditions. This technique assesses the value of the security under a break-up scenario.
3. Risk management
Phoenix actively manages the risks in its portfolios through understanding and quantifying their potential impact under various scenarios, and through portfolio diversification. Given we seek to deliver equity returns over the long term, risk cannot be entirely eliminated, and the value of your investment can fall, particularly over short timeframes.
For a more detailed explanation of the investment process specific to each fund, please read the applicable Product Disclosure Statement and Additional Information Document.