Investment philosophy and process

Investment philosophy and process

We have a fundamental and style-neutral investment philosophy. Our thesis is that in the long run, the difference between share price and fair value is relatively low. However, short term, stocks may be over- or undervalued. Our ambition is to exploit short term price fluctuations to buy shares which are undervalued, and sell shares which are overvalued. To implement our investment philosophy, we have an experienced investment team with a structured and repeatable investment process, which we believe has contributed to our strong historical results.


Our analysis involves both qualitative and quantitative factors, and includes valuation as well as elements from strategic analysis.  The thorough process represents a certain hurdle for new investments and we believe this helps us avoid many loss-making decisions.

 

Our process consists of five main parts:

  • Stock selection: The shares in our investment universe are well coved by our experienced portfolio managers and investment team. In our routine ranking of Fair Value, we go through all the shares we consider part of our investment universe and pick out a selection of stocks for further research.
  • Research process: Next step in the process is to research the selected companies. We examine company reports, meet company management, do company visits, and use sector experts. We discuss company potential in our investment team.
  • Fair Value analysis:
    o Company: We examine the company’s senior management, board and owners.  We also look at its access to resources like talent or natural resources, which may give rise to a competitive advantage. We want to invest in well-run companies with a profitable business model and a clear strategy.
    o Valuation: Valuation models include Discounted Cash Flow models, and valuation multiples. We also look at dividend yield and capital returns, in light of the company´s growth and risk profile. Further, we make Sum-Of-The-Parts valuations, where we seek to value a company through the value of its constituent businesses.
    o Sentiment: In sentiment we look at share-specific considerations, most importantly stock liquidity. Good recent stock price development or favorable market themes can improve the liquidity of a stock.
    o Sector: Here we analyze the industry and its competitive situation. Some sectors have strong barriers to entry, and firms may enjoy strong market power; competition is oligopolistic or monopolistic. Companies operating in such sectors are more likely to generate excess returns to investors over time, compared to companies operating in freely competitive, non-consolidated markets with no entry barriers. Further, we examine the outlook for market demand versus supply. High market growth is attractive, especially in combination with limited supply additions from competitors. We also look at macro trends and the potential for sector disruption.
    o ESG: We believe strong performance over time depends on investing responsibly. Companies with a strong record on the environment, corporate governance and social responsibility are, in our view, more likely to provide excess returns to investors over time. We thus examine issues surrounding the environment, corporate governance and social responsibility.
  • Ranking: Based on the above criteria, we rank all the stocks in our investment universe. The ranking is performed routinely, about once a month. In this process we also set individual stock price targets.
  • Portfolio construction: The ranking is a tool we use to inform our over- and underweight positions. This is not a rigid approach where the exact score must correspond to an exact portfolio weighting. Still, the highest scoring companies should more or less correspond to our largest portfolio weights. The ranking ensures all the elements from our fair value analysis are included in our portfolio construction.

 

 

 


Arctic Norwegian Equities is a UCITS fund focusing on Norwegian equities. The fund seeks to buy undervalued shares and be a stock picker through a structured and repeatable investment process. Our bottom-up fair value analysis includes analysis of the company, its sector, valuation, stock sentiment and ESG. The fund is style independent, and has no sector limitations. The fund’s benchmark is Oslo Stock Exchange Mutual Fund Index (OSEFX).

Past performance in the fund is no guarantee for future returns. Future returns depend on the market, fund manager skill, fund risk level, costs, among others. Performance in the fund may at times be negative and may vary within periods.