Contextual Value Investing

Our investment goal is to deliver long-run real returns in excess of the risk-free rate on a risk-adjusted basis. Risk-adjusted, to us, means taking drawdown risk into account, as this is of cardinal importance. Our thinking in times of uncertainty is to err on the side of caution, which means we would focus on controlling downside risk at the expense of return.

We could thus be arguably labelled as defensive investors, placing emphasis on capital preservation at the expense of seeking risky returns near the top of the cycle. This means trying to avoid the big pitfalls, to avoid the big mistakes. Expressed differently, it is important that the portfolios we manage do not give back gains symmetrically when the market turns down.

The principle of value investing involves the buying of securities at a discount to our estimate of fair value, thereby providing a margin of safety against the uncertain future. Generally, valuation swings are a result of factors that include short term stresses in the market and the emotion of investors and their reaction to various events.

Counterpoint Asset Management aligns itself with value investing. However, we believe that a security trading below its fair value needs to be assessed against the broad macro environment to ensure that it is indeed cheap given the current circumstances and various factors at play in the market. Value can therefore not be assessed in isolation of the investing environment at the time; in addition one has to take note of the context in which value is assessed.

We call this approach Contextual Value Investing, best describing our investment style. This investment style requires a good understanding of company specific drivers, as well as key economic and market factors that influence that company. All these factors determine Contextual Value.

INVESTMENT PROCESS

Financial markets, in general, offer opportunities that can be exploited. In the long run aggregate share and property prices are affected by the growth rate of the economy. All tradable and investable financial securities have a niche in the risk-return tradeoff spectrum, from money market instruments to cyclical equities. The key risk factor facing investors’ is the risk of permanent loss…