Investment Process

	Investment Process The Company’s Portfolio will be made up of three sub portfolios: Growth Shares: focusing on companies that indicate a high propensity to strong capital growth over the medium to long term. Income Shares: to allow the writing of options. Boutique Managed Funds: who have an investment methodology that shows great potential to outperform the ASX 300. The sub portfolios will be blended with consideration given to the appropriate balance between large and small entities as well as diversification by industry sectors. The Freeman Fox share selection process ranks key financial variables and valuation assessments for each of the ASX 300 constituent entities and other ASX listed entities considered by Freeman Fox to be suitable for assessment. Growth Shares Selection into the Growth Shares portfolio is determined by the subjective and objective assessment of the following criteria: Growth Quality of Management Financial Soundness Market Position Value Risk Return. The Investment Manager looks for companies that: Are simple and understandable Have a consistent operating history Have favourable long term prospects Have a strong competitive position in their marketplace or niche Have low borrowings and interest costs Have quality management Do not require considerable capital investment Have high profit margins Can be bought at a discount to real value. Criteria for Ranking Investments Not all companies selected will meet all of the above criteria although, generally, they must meet a majority of the criteria. The Investment Manager will make judgments as to the strengths and weaknesses of each company across the criteria and determine whether the stock is appropriate for selection having regard to the Investment Mandate. Companies are sorted and ranked based on their performance against the following criteria: *Revenue Growth* Companies that have dynamic leadership tend to have dynamic growth. *Return on Shareholders Equity - ROE* Measures the amount of profit being made in relation to the shareholders’ equity. *Earnings Per Share - EPS* EPS allows for ready comparison of companies of different values and is the basis of a number of calculations used to assess the value of a stock. Gearing The gearing ratio measures the percentage of capital employed that is financed by debt and long term finance. The higher the gearing ratio the higher the dependence on borrowings. The higher the level of gearing the higher the level of financial risk due to the increased volatility of profits. Interest Cover The “Interest Cover” ratio indicates how easily a company can meet its interest payments. It stands to reason that a company with a strong cash flow position against its interest costs will stand up to economic fluctuations better. *Price Earnings / Growth - PE/G* It is a value for money ratio which compares the Price Earnings ratio to the EPS Growth. The shares are regularly ranked against these criteria and the Investment Manager attempts to acquire the top ranked shares when they are trading at a relatively low PE/G. Income Shares Income shares are selected on the basis of their ability to produce cash returns through the process of using derivatives to write calls against the stock. Writing calls is selling the right to purchase shares at a higher price than the price they are today on or before a date in the future. In return for this a premium is received. When writing a call the investor ‘profits’ when: the share price goes up because they receive the premium and the increase in the value of the share up to the strike price; the share price goes sideways because they keep the premium; and the share price goes down less than the original amount of the premium they were paid. When writing a call the investor ‘loses’ when, the share price goes down more than the original amount of the premium they were paid. Freeman Fox implements an approach based on Peter Spann’s Buy Write strategy. Options are selected that: Are out of money (strike price above the current share price) Expire at the end of the month or quarter or an appropriate longer date of expiry Defensive strategies implemented can include: Buying Back - which cancels the option position and therefore the risk of exercise by taking an equivalent option; Rolling Up - which minimises the risk of exercise by increasing the strike price of the option; Rolling Out - which minimises the risk of exercise by replacing the existing option with a new option with a later expiry date. Boutique Funds The Investment Manager intends to seek out boutique managed funds that have the potential to outperform the ASX 300 Share Index. The Investment Manager looks for funds that will complement its direct investment strategy of seeking a mix of growth and income. Generally Funds will only be selected instead of direct investment where the Investment Manger believes they will outperform, complement, provide additional leverage or give diversification and/or risk reduction to their own efforts. Portfolio Construction *Growth Shares* - The Growth sub portfolio selection is taken from the highest ranked shares using the 8P’s methodology, which are at the high end of Freeman Fox’s quality scale. The aim is to select a stock portfolio of between 8 to 16 quality growth companies at reasonable prices, whilst maintaining reasonable diversification across sectors. The Investment Manager may, in its discretion, operate outside these parameters and select more than 16 or less than 8 stocks. Income Shares - This sub portfolio is taken from the ASX optionable stocks. The aim is to select a stock portfolio of between 6 to 12 quality companies at reasonable prices that are optionable and should produce a reasonable cash flow versus risk. The Investment Manager may, in its discretion, operate outside these parameters and select more than 12 or less than 6 stocks. *Boutique Funds* - The Investment Manager’s mandate will allow investments of up to 60% of the total value of the Company’s assets into these boutique funds. Permitted % of Portfolio Value Growth: 0% - 80% Income: 0% - 80% Boutique Managed Funds: 0% - 60% Cash: 0% - 40% Blending The blending of the sub portfolios may not be in equal proportions. Freeman Fox will weight the sub portfolios depending on the relative merit of each of the sectors of the share market, e.g. value, growth, large and small capitalisation. Leverage The Company already invests in instalment warrants to provide leverage on part of the portfolio. It is also the intention of the Investment Manager to gear parts of the portfolio where appropriate using borrowed funds and other market mechanisms.