Aberdeen believes, given the inefficiency of markets, that superior long-term returns are achieved by identifying good quality stocks cheaply and holding for the long term. Sound fundamentals drive stock prices over time. We identify good companies from first-hand research, and add value from active management, which constitutes intensive and ongoing scrutiny at the company level, and not from portfolio trading.
We hold absolute return to be more important over the long term than index-relative. We do not see indices as providing meaningful guidance to the prospects of a company or its inherent worth. Neither market capitalisation nor index membership is a guarantee of quality either. As such, we do not use indices as a starting point for building a portfolio, preferring to rely on common sense checks and the principles of diversification.
We are comfortable taking decisive bets against the benchmark, underpinned by convictions from proprietary analysis. We do not equate risk with divergence from benchmark, but with investing in companies that do not deliver.
We follow a bottom-up process based on a disciplined evaluation of companies through direct visits. Stock selection is the major source of alpha. No stock is bought without our managers having first met management, and detailed notes then written. We estimate a company’s worth in two stages, quality then price. Quality is defined in reference to management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios, market, peer group and business prospects.
Top-down factors are secondary in portfolio construction, with diversification rather than formal controls guiding geographical and sector weights. Little regard is paid to stock size, other than to ensure liquidity. Aberdeen portfolios are generally conservatively run, with an emphasis on traditional buy-and-hold, with top-slicing/topping up preferred to outright trades, resulting in low turnover. Typically they have higher return on equity/assets and lower debt–to-equity than market average.
Funds are managed on a team basis, with investment managers doing their own research and analysis. Desks operate independently but each has a model portfolio that contains its best ideas, and forms the basis for portfolios, be they retail or institutional. All ideas are shared via formal committees and common databases, with desk heads and the CIO enforcing consistency across the Group.