Portfolio construction

Even though there are many theories on portfolio construction, the magic formula has yet to be discovered.

Beyond the fundamentals of companies and their valuations of the moment, our portfolio construction process is based on:

  • The Growth, Dividend, Quality and Valuation Quartet whose instruments express themselves with different power at different times.
  • Tools such as common sense, patience, pragmatism, or courage that we can use thanks to our independence and our artisanal spirit.

 

We have already used the instruments of the Quartet when selecting the companies, but they are also involved in the construction of the portfolio. Indeed, depending on market developments, some of these instruments will become more, or less loud to be in harmony with the others. While Growth and Dividends remain the drivers of value creation, and therefore of the fund's absolute performance, Quality and Valuation protect the capital as much as possible during shocks by avoiding catastrophic scenarios.

Portfolio construction Equalizer

Among the Quartet, Quality is the instrument whose music must constantly resonate, and which therefore constitutes the musical background of the portfolio. For long-term investors, Quality is indeed the guarantee of the sustainability of growth and dividends.

Growth in earnings per share and the ability to distribute dividends are the drivers of value creation for corporate stocks over the long term. However, these two instruments do not necessarily have to always play with the same intensity.

In certain market configurations, especially when the overall economic growth is low, investors tend to reward companies capable of delivering some growth. Sometimes, this premium reaches unreasonable levels and therefore future returns may melt down or even become negative, even if the expected growth does indeed materialize. The risk is even greater in the event of disappointment in relation to high expectations.

It may then be appropriate to consider quality companies with lower growth but with a high dividend distribution capacity and trading at reasonable prices. This makes it possible to escape the compression of premiums and valuation multiples of the so-called “growth at any price” companies. In other words, when Growth is expensive, the Dividend instrument is expected to play louder.

Valuation not only protects against excessive market optimism but must also reflect the micro and macro risks of each investment. When investors become less rigorous and risks rise, the sound of Valuation must be heard more.

Particular and permanent dexterity in handling the Growth, Dividend, Quality and Valuation Quartet is necessary in order to produce an optimal portfolio. More growth can justify its higher valuation and vice versa. On the other hand, more dividends and a more reasonable valuation make it easier to get through difficult times.

A portfolio can be understood as a picture or as a film. We have so far discussed the pictures. When we watch the movie, our portfolio tools come into play, including:

  • Patience: The time horizon is beyond 3 years to allow our investments to express themselves. Also, as we do not know how to predict THE moment, we move forward in small steps to build our positions or to get out of them, or to make them evolve over time. Although some opportunities may be lost, major errors are generally avoided.
  • Discipline: To apply our principles, our roadmap is clear, which also allows us to take a step back and avoid getting trapped in short-term pitfalls.
  • Common sense: In a world moving faster and faster and faced with an abundance of poor-quality information, the ability to make independent decisions is crucial.
  • Courage:  It is easy to stay with the crowd and be right or wrong with others, but much harder to follow your own path.
Our portfolio tools help us ensure that the evolution of the portfolio over time is done smoothly, so that the succession of pictures forms a coherent film that is faithful to our principles.