Systematically identifying undervalued companies

Lingohr’s strategies are based on a proprietary and continuously refined investment process called „CHICCO“. The process combines fundamental and quantitative elements into a holistic approach, which is independent of individual persons and repeatable.

Controlling human emotions and behavioral biases is a central focus. They are the main source of mispricings and prevent rational evaluations of companies.

“The investor’s chief problem – even his worst enemy – is likely to be himself.“

Benjamin Graham

Investment Process (CHICCO-Methodology)

The core of our disciplined investment process is the identification and selection of undervalued stocks. The proprietary screening methodology captures the knowledge of more than 25 years of factor research and model development.

All models focus on the company’s free cash flow and use complementary factor groups (among others deep value and profitability metrics) to enhance their stability and explanatory power. This enables us to systematically identify fundamentally attractive companies from the multitude in the global investment universe.

The entire investment process is based on an optimal combination of man & machine, leveraging the advantages of both worlds. Starting with our multi-factor models, the global investment universe will be reduced in several steps from approximately 12.000 stocks to around 300.

After the computer has conducted the screening in order to identify potential buy candidates, portfolio managers carry out a thorough plausibility check on each stock.

Fundamental assessment of buy candidates

The fundamental analysis of buy candidates determines if a stock will be added to the global buy list. Among others, the following elements are part of the plausibility check by the portfolio management team:

  • Data Errors: Verification of relevant ranking factors
  • Factor Causation: Suitability of factors for respective company/sector
  • Inconclusive Signals/New Situations: Contradicting signals, volatile rankings
  • Common Sense Valuation: Peer group comparison and valuation in historical context
  • Value Traps: Balance sheet and financial strength, ESG factors, sales and profit margins, DCF upside potential

Findings of the fundamental assessment as well as all investment decisions are systematically documented. They serve as a basis for continuously improving the screening process and the explanatory power of the models.

Portfolio construction

After successfully passing the fundamental assessment, the respective stocks are added to the global buy list which serves as the basis for populating all portfolios.

An essential element in constructing portfolios is broad diversification and equal weighting of the selected stocks. By doing so, we ensure that opportunities and risks are systematically spread and avoid cluster risks.

Country weights are either based on the relative attractiveness of their specific markets or through predefined equally weighted modules. Sector allocation is determined by the bottom-up stock selection process.

A modular set-up allows for flexible customization of portfolios according to clients’ specific needs and investment restrictions.

Ongoing Monitoring & Discipline

CHICCO rankings are refreshed on a weekly basis. If necessary, individual stocks are exchanged on the basis of disciplined buy and sell rules. Major adjustments in the context of rebalancings ensure the attractiveness of portfolios and restore equal weights.

Integrated risk management

At Lingohr, risk management is embedded in the entire investment process. For us, risk and return are part and parcel of any portfolio management activity. Hence risk management is not about the exclusion of risk but rather the careful and appropriate way of controlling, managing, and monitoring it.

Risk considerations are therefore a central part of all steps of the process. The following elements should be highlighted:

  • Development of Models: We put great emphasis on examining the fundamental characteristics of individual factors. These include structural biases caused by individual sectors as well as traditional risk measures such as the maximum drawdown in sub-periods. The interaction of factors is also examined in detail from a risk perspective.
  • Stock Selection: On the one hand, we analyze whether the quantitative ranking provides a representative assessment for the individual company. Secondly, we focus on valuation-, balance sheet- and business risk of each company. Price volatility or tracking error only play a minor role.
  • Portfolio Construction: Equal weighting of all stocks implicitly ensures broad diversification which makes our results independent of individual outliers. Additionally, the portfolios are checked for extreme clusters in terms of sectors, factor tilts or country risks.
  • Unwanted Risks: Before implementation, portfolios are analyzed quantitatively and qualitatively to evaluate their aggregate characteristics. Only signals that are fundamental and meaningful from an investor’s perspective are implemented.
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