Investment insights

Managing risk through our investment process

Our primary objective is to build long-term wealth for our clients. To do this, we balance investment performance with the risk incurred in generating this performance, which we define as the risk of permanently losing our clients’ capital.

Our approach is to build diversified portfolios of undervalued investments from the bottom up, to maximise the probability of attractive long-term returns while limiting the risk of permanent capital loss. One of the many considerations in our process is to control for share-specific risks in client portfolios by ensuring they are sufficiently diversified.

How we limit exposure per share to control risk: Allan Gray’s star-rating system

After rigorous research on a share, an investment analyst will prepare a detailed report which is discussed at a formal meeting attended by the investment team. After thorough debate, the investment team’s equity members vote on the recommendation for the share – each member’s vote carries a different weighting dependent on their experience and demonstrated performance. The results of the vote will formalise a buy or sell status for the share, as well as a star rating. 

The share’s star rating considers the risk factors pertinent to the share and determines the maximum exposure permitted in clients’ portfolios, thereby limiting exposure to share-specific risks and ensuring that clients’ portfolios are sufficiently diversified. The factors which are considered in attributing a star rating include:

The standard star rating scale works as follows:

 

How do shares get into the portfolio

We believe that individuals make better investment decisions than committees. Our portfolio managers are individually accountable for the performance of their portfolio, despite relying on the joint research and peer review effort of the entire investment team. The decision to purchase a share that is on the buy list, and to what degree of the maximum allowable exposure (set by the star rating), is therefore up to each portfolio manager

Evaluating and managing risk relative to potential returns is key to our investment process, and the star-rating system is one of the ways we endeavour to control risk to create long-term wealth for our clients.

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