Majority of the world’s equity indices are backward looking in the sense that the largest companies represented in the indices are those which have already grown into large companies in the past. The growth companies of the future are usually smaller today than the typical index heavy-weights and therefore often have a lower weight in the index. Funds which are invested near the benchmark are likely to have a low exposure to the companies with the most attractive growth potential in the future. At AGCM, we normally stay clear of companies with no or slow growth in earnings and free cash-flow, even if the weight in index is high. Equally, we may have substantial exposure to companies which could be small index constituents or even off index because it is listed outside China. We are active in the sense of giving little or no consideration to equity index compositions. In industry parlor, this is called "Active Management”.A related cornerstone of our investment strategy is to have a concentrated portfolio of 30-35 stocks. A limited number of holdings allow for a closer contact with the companies, a better understanding o f the growth potential and possible risks with our identified growth scenario. A concentrated portfolio also allows for a meaningful exposure to our best ideas.Bottom up
At AGCM we employ a bottom-up investment process which is based on in-depth fundamental equity research. In our research, we use our network of top-rated analysts in Asia along with industry experts within the network of AGCMs management and Board of Directors. We strive to identify companies with the best prospects for sustainable and projectable growth in revenues and free-cash flow over the long-term. Earnings growth is the principal driver of share price in the long run, regardless of industry. We look for good entry points and compare and relate earnings growth to valuation levels. Our equity research entails extensive travelling, company visits and meetings with senior managements. We meet with hundreds of investible companies in China each year.
There is a distinction between long term investing based on fundamentals - and short term speculation based on second guessing how the action of other investors will affect a share price in the near term. Our approach emphasizes trying to project a company’s development in the next few years rather than trying to assess if the next quarterly results will be below or above what the market believes. We take a longer term view for each company and try to look several years out. We look for companies with potential for the share price to double or triple in five years. We do the research on the industry, the individual company, products, strategy and management, and use this as input for financial analysis and valuation. We compare it to our other holdings and other alternatives. Valuations change continuously and sometimes dramatically. Our long term view helps us to capitalize on short term price volatility by trading around our long term positions. Our long term views are frequently re-evaluated.