Fundamental equity analysis forms the core of Brock Milton Capital. To begin with, we apply a relatively strict quantitative selection process to filter out the large proportion of companies that do not pass our screenings. With the global markets as our playing field, this is necessary, given the vast numbers of companies out there. Following this screening, we start our deeper analysis of the remaining companies using around 12 different factors. The company selection process is similar across all our funds.
For us, it is crucial that we invest in companies of the highest quality. We look in particular at a company's return on equity, debt, turnover, and profit growth. It might sound banal, but if a company cannot grow its profits, its share price is unlikely to rise in the long run. One important aspect is setting key figures for the valuation. Although a challenge, this is what makes the difference.
As self-confessed stock nerds, we are in our element analyzing these thousands of companies around the world.
Even more important for how companies deliver in the long term is their corporate culture. This cannot be screened for; we need to meet the companies and talk to their management, and not just once, but often, to gain a full understanding of their culture. For us, this means more than 300 company interactions each year. Another key factor in our work is active engagement with our companies, encouraging them in their ESG endeavors. We could do this digitally, but we believe it has a greater impact when we physically meet companies.
Our funds are split between what we call Champions and Special Situations. Simply put, Champions are profitable growth companies and Special Situations are value stocks. We consider the Champions to form the foundations of our funds and Special Situations to offer a more opportunistic approach as positions we hold for a shorter period of time. Changes in the market's nature provide us with the possibility to cherry-pick companies that have been punished by the market and thus trade at low valuations. Generally speaking, our funds comprise 85% Champions and 15% Special Situations. Below, you can read more about the characteristics of each type of holding.
In addition to BMC Global Select and BMC Global Small Cap Select, Brock Milton Capital AB manages the fund COELI SICAV II – Global Opportunities. Click here and read more about this fund on Coeli's website.
Finding potential investments
We find our investment candidates in several ways. One is via our own screening model, in which we rank stocks using a number of key figures and other information found in different financial databases, including Bloomberg. We also attend equity conferences and read analysis from brokerage houses and within the financial industry. One of the best and most exciting methods we use is the 300-plus company visits we make around the world each year, from Sao Paulo to Mumbai and San Francisco.
Sustainability analysis
The next phase is our ESG analysis, where we investigate the companies' sustainability work and their impact on the environment. Among the aspects we look at are gender balance in both senior management and on the board, that the CEO and chair of the board roles are separated, and that the companies have an internal audit function reporting to management. We also consider what the companies produce and how that impacts the environment. We look at whether the companies have signed the UN Global Compact, urging them to do so if they have not. In the cases where we decide a company needs to improve its sustainability, we arrange a meeting with management to try to encourage them in the right direction.
Deeper analysis
The analysis phase covers our investigation into where the companies' turnover stems from, trying to predict how that will develop in the coming years. We read numerous annual and quarterly reports, looking for information on sustainability work, analyze the competition, and make further, more in-depth company visits and calls. We use the data gathered to build our financial model and write our own analysis.
Portfolio management
Once a company has passed through the eye of this needle, we decide how large a holding we want for the fund and how we will make the trade. What matters is the ability to create returns based on the valuation and business risk.
Improvements and learning
The last part of our investment process is to follow the companies' business development day by day, concentrating on whether our original investment idea remains valid. We also place great emphasis on ongoing self-improvement and learning from our mistakes. Sometimes we meet with a company we don't own, and would not want to own, simply to see for ourselves how a management team can destroy shareholder value. From this, we can further refine our investment process.
