Research

Our investment style and process

Perpetual’s investment process has been part of the company’s culture since our flagship fund, Perpetual’s Industrial Share Fund, first opened to investors in August, 1966.

Australian Shares

At Perpetual we select shares (stocks) on the basis of stock-specific fundamentals and then by the relative value of the shares. As such, we are commonly referred to as a ‘bottom-up’ fund manager. The majority of our analysis and research emphasis is at the individual company level, as we believe that company characteristics and qualities are the most important determinants of share prices over the longer term.

Perpetual seeks to buy shares at levels where we believe the intrinsic value of the company is greater than the current market price. In other words, we will invest in companies when the market price is below what we perceive to be fair value given a company’s fundamentals and market conditions.

Our portfolios typically demonstrate "value" characteristics. They will benefit when the market agrees with the effective mispricing which sends the share prices higher. We often tend to invest in stocks exhibiting low price-to-book values, low price-to-earnings ratios and higher yields. As a result, our investment in various stocks and sectors is likely to differ from the market, and thus the benchmark index.

Our Bottom-Up Investment Philosophy Perpetual's Equity Process

Perpetual’s bottom-up value based stock selection process involves four steps. 

Step 1: The Idea

This first step simply involves the identification of a potential investment opportunity. Our analysts then conduct a quick review to decide whether the opportunity is worth further investigation.

Step 2: Stock Selection Criteria

After a stock has been identified as a possible investment opportunity, it must then pass the ‘stock selection criteria’. This is the most extensive and important step within the equity process. Every company - large or small - is subject to the criteria.

If any existing or potential company fails the criteria it is excluded from the portfolio. There are four specific criteria which are investigated and analysed:

  • Sound management - We search for companies that are managed by experienced, clearly focused and prudent people.
  • Conservative debt levels - Although companies with high debt levels are often favoured during sharemarket booms, our focus on minimising risk restricts such companies from being included in our portfolios. These companies are often the first to be adversely affected during economic slowdowns.
  • Quality of Business - We assess a company’s ability to produce established products and services, the nature of the industry sector in which the company operates, market share and competitive factors such as barriers to entry.
  • Recurring earnings streams (in the case of industrial companies) - We seek to invest in companies which are likely to produce a recurring earnings stream given normal operating conditions.

Researching companies is a daily routine for Perpetual's analysts. Research sources can include company contact, statutory reports, industry contacts, press material or specialist stockbroker reports. Of these, company contact is the most essential and extensive element. Our equities team makes around 1000 contacts with companies annually. It is not unusual for our analysts to also meet with competitors, customers and suppliers of the companies that we invest in.
If a company passes the stock selection criteria, it can then form part of a 'universe' of available stocks from which our portfolios are chosen. On average, Perpetual follows approximately 250-275 companies, of which about 200 pass our stock selection criteria and are included in our universe of stocks.

Table 1 provides an example of a comparison between Company A, which is included in Perpetual’s universe; versus Company B, a company which does not pass Perpetual’s rigorous stock selection process. As you can see from the table, Company A meets all four criteria.

 

On the other hand, Company B does not meet our criteria as it has high levels of debt, operates at a loss and has limited management experience. At the time of analysis, Company B is not included in Perpetual’s universe.


Step 3: Portfolio Construction

Each analyst has their own universe of stocks which have passed the stock selection criteria. Analysts then rank stocks on a scale of 1 (best) to 5 (worst) on the basis of expected performance and value. These rankings then form an important tool for our portfolio managers to use in constructing a portfolio.

Step 4: Portfolio Maintenance

Portfolio maintenance ensures that all stocks in the portfolio are continually subjected to the disciplines of our equity process. As it is an integral part of the process, it forms part of our analysts’ daily activities. As a result of Perpetual’s rigorous stock selection process, Perpetual Investments is one of Australia’s leading funds management companies, highly recognised for its management of Australian shares.


International Shares

In March 2005 Perpetual launched a global equities business, PI Investment Management Limited, with the appointment of a team of investment specialists based in Dublin, Ireland. The investment team adopts a very similar investment philosophy to Perpetual’s successful Australian Equities team, employing a fundamental, bottom-up investment process focusing on quality and value.


Mortgages

Perpetual’s approach to investing in mortgages is to invest in quality first registered mortgages with the aim of providing investors with a secure investment and regular income. Perpetual aims to achieve this objective by:

  • Selecting individual mortgages according to strict lending guidelines
  • Ensuring a spread of mortgages across sectors
  • Selecting borrowers who are financially sound

Perpetual invests in mortgages across retail, residential, commercial and industrial properties in Australian capital cities and major regional centres. Perpetual’s asset managers apply the following proven mortgage selection criteria:

  • At the time of the advance, a loan cannot exceed 66.6 percent of an independent market valuation on income producing property where annual net rents are not less than 80 percent of annual interest payments, unless a strong repayment ability is proven.
  • Owner occupied properties are considered where borrowers can demonstrate a strong repayment ability.
  • The maximum loan term considered is five years.


Fixed Interest Securities

Our focus within fixed interest is on active credit management. Perpetual believes in an active approach to managing credit securities. Due to asymmetric risk associated with credit, our ability to focus on avoiding downside risk through active management adds significant value relative to relevant benchmark indices while preserving capital. We follow a passive approach in regards to our exposure to government and semi government securities within enhanced fixed interest portfolios.


Property

Perpetual is an active manager of property. This means Perpetual's investment managers focus on selecting listed property securities and direct properties that they believe offer the best quality and value relative to other property investments in the market.

Research is core to the decision making process and involves analysing both individual investments and the overall market environment.


Individual Investment Analysis

Individual investment analysis is the main emphasis of the research. In determining investment quality Perpetual seeks to identify individual investments that demonstrate: 

  • Sound management: Perpetual searches for listed property securities and direct properties that are managed by experienced property professionals with a proven ability to deliver results with their investment strategies.
  • Earnings and distributions growth: Perpetual seeks to invest in listed property securities and direct properties that have recurring income and distribution growth, where the growth prospects of the asset are yet to be captured by the market.
  • Quality portfolios: Perpetual seeks to identify listed property securities and direct properties that have quality property portfolios. When assessing quality, Perpetual analyses sector exposures, geographic locations, tenancy profiles and opportunities for management to add value to the portfolio through development, refurbishment and disposition of the properties.
  • Sound capital management: Perpetual focuses on listed property securities and direct properties that have sound capital management strategies that address gearing levels, debt hedging positions and cost of capital. 
Market Environment Analysis

Perpetual also conducts fundamental analysis of the economic environment, financial markets and direct property market conditions in order to identify trends that may impact on the performance of individual property investments. Perpetual's strong commitment to in-depth proprietary research provides investors with access to an investment approach that aims to maximise investment returns through investment in quality listed property securities and unlisted property funds that have the potential for medium to long-term growth. 


Diversified Funds

Perpetual offers a range of diversified funds to meet investors’ growth and income requirements. Our diversified funds are managed in an active fashion, which means our investment team can use the fund’s full asset allocation range. This style enhances performance by allowing us to favour asset classes that perform better under certain conditions.

Perpetual offers Diversified Funds such as Perpetual’s Split Growth Fund and Perpetual’s Balanced Growth Fund. A well managed share component is integral to the success of a diversified fund because it provides the greatest opportunity for benchmark outperformance.

 

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