Our philosophy and process

Our distinct investment philosophy and process for our UK, global and European equity strategies places sustainability at its heart

Potential, Valuation and Timing

Our PVT investment philosophy recognises the three key criteria that we believe enable us to discover the most promising investment opportunities regardless of market conditions.

We evaluate all stocks according to a combination of these clearly defined and continuously monitored investment factors. This enables our team to maximise returns and minimise risk.

Potential

Valuation

Timing

Categories of potential

Over the years we have found that companies that can deliver above average potential divide into four categories; these relate to where a company is in its ‘life cycle’:

Growth – the delivery of strong revenue and profits growth

Quality – a business franchise that delivers a superior return on investment

Recovery – the process whereby a company produces a recovery in profits to ‘normal’ levels following decline

Asset-backed – the delivery of asset backed growth to a long-term investor.

Sustainability

Our investment philosophy is further enhanced by a fully integrated analysis of every company's sustainability credentials.

For further reading on our ESG integration in the PVT investment philosophy and process, click here.

image showing the three pillars of river and mercantile's sustainable philosophy and process

We evaluate sustainability through the pillars of People, Innovation, and the Environment, looking beyond those companies typically rated leaders by third party ratings and thereby including improvers (companies undergoing change leading to positive long-term outcomes) and enablers (whose products contribute to driving sustainability improvements).

Not only is backing transitioning companies an important driver for a more sustainable future, we believe this is a significant source of alpha.

Our analysis determines a sustainability 'score' for each company we look at. These are broadly categorised as follows:

S1 - a sustainability leader in its field and/or a clear beneficiary of sutainable trends

S2 - Solid S-PVT credentials and no clear impediment to value creation or share price performance

S3 - S-PVT improvement required, but evidence that this has started and/or engagement potential

S4 - S-PVT a clear barrier to value creation, no evidence of improvement and/or low likelihood of engagement success (including failed attempts)

Sustainability investment in action

A selection of investment case studies demonstrating our sustainability analysis

"We are, first and foremost, bottom up stock pickers, but the PVT philosophy provides an unemotional analysis of an investment, detached from swings in markets and investor sentiment that can come from macroeconomic events and the news"

Hugh Sergeant, Head of Value and Recovery strategies

Investment process

We are practical investors who live and breathe the evaluation of company prospects. We also believe there are repeatable investment cycles that can be systematically exploited, so we combine quantitative research with fundamental stock-specific analysis.

Our proprietary quantitative analysis tool allows us to quickly and systematically review vast amounts of complex data efficiently, scrutinising a universe of UK and global equities in order that we can track down and target the best opportunities to investigate further.

We then use the knowledge, expertise and, importantly, experience of our team to carry out fundamental research to validate every PVT idea to find those that will work best in our portfolios.

Verification process

There are four stages to PVT idea verification:

Screening

Our quant tool's findings are discussed at our weekly team meetings. We’re looking for high scoring stocks. Once identified, one of the team is nominated to manage the verification process for that stock.

Validation

We test the PVT score and investment thesis through analysing the key drivers of PVT relevant to the type of company we’re looking at.

Company meetings

Company meetings are an integral part of our process but we don’t believe in having meetings simply because we can or to screen the market. Instead, we meet with companies when we need answers to specific questions such as the key drivers of return on capital and growth.

Debate

We believe that team debate is an important process in ensuring effective testing of the validity of a stock’s PVT investment case, its strengths and weaknesses.

In the weekly verification meetings, all new ideas are presented, debated and questioned before any investment is accepted into the portfolios.

The importance of an effective sell discipline

As well as identifying exciting opportunities that we want to buy, we also monitor every company already in our portfolios to know when the time is right to exit or sell a position.

We systematically monitor the PVT scores of all portfolio holdings in our quantitative analysis tool. When scores fall significantly, we re-verify the investment case and debate the investment’s position at the weekly meeting. A systematic sell discipline is critical. Our selling process is driven by the same PVT philosophy. Shares where potential is deteriorating, where valuations are less attractive following a period of outperformance, or where timing is no longer optimal will all be examined.

"The longevity and consistency of a stable investment process continues to reap benefits for us and our clients. It allows us to remain true to our investment beliefs and insulated from the distraction of day to day market movements. By combining quantitative analysis with the knowledge and experience of our fund management team we ensure that our focus is always exactly where it needs to be – on finding great investment opportunities."

Charles Benett, Head of PVT Equities