Security Selection

Watermark employs a fundamental research process in identifying investment ideas from our investment universe. Investment ideas come from monitoring economic and industry trends as well as extensive contact with company management and industry sources.

Once identified, investment opportunities are screened to ensure they are of an investment grade. A full qualitative assessment of the proposed investment is completed to establish whether the business is of a suitable quality and attractively priced.

Investment Ideas and Opportunities

Investment opportunities emerge from close examination of industry trends. These developments may include economic, political or legislative changes that impact the structure and competitive environment in which a company operates. Investors in many instances are slow to identify and price these changes.

The best investment ideas present a unique view, are relevant to the value of the business and are not currently reflected in the share price.

Qualitative Review

Once a suitable investment opportunity has been identified, a full review of financial performance will be completed. This is usually followed by a meeting with management to further develop an understanding of the business and the management philosophy. Where possible, members of the investment team will also meet with suppliers, regulators, competitors and customers to gauge the competitive environment.

Short Selling

Watermark employs a similar security selection process as outlined above, but is looking for the opposite qualities in companies to borrow and sell. We believe the best “shorting” opportunities are found in companies with weak fundamentals that can be sold for more than they are worth.

When targeting companies to borrow and sell (short), we look for the following:

  • A history of inferior returns
  • Management with a poor track record.
  • Businesses that are highly competitive and struggling to grow
  • Securities that are expensive on a range of valuation measures

Portfolio Construction

Unlike a traditional fund, Watermark constructs two portfolios, a long and a short portfolio with the weighting of each investment in each portfolio loosely correlated with the level of conviction around individual investment ideas.

This process ensures we construct portfolios around the best individual investment ideas, with the highest conviction, while retaining a bias in favour of good, well managed companies to buy (long), and weaker businesses to sell (short).

The relative size of the two portfolios is a consequence of the quantity and quality of investment ideas we can identify to buy and sell. Macroeconomic and sector research along with a full range of risk metrics, will influence the overall weighting of each investment.

The relative size of the long and short portfolios will determine the net market exposure. The larger the short portfolio relative to the long portfolio the lower will be the net market exposure and the higher the cash weighting. If the portfolios are of equal size the fund is market neutral with no net market exposure.