The Focus Funds invest in companies that have consistently underperformed their peers as a result of structural or strategic governance weaknesses that could be remedied by active shareowner involvement.
The Focus Funds undertake a multi−faceted analysis of each potential investee company. In the first stage, the analysis follows a typical performance screen of companies against their peers based on long−term total shareholder return and cash flow return on investment. Additional information is gathered through discussions with brokers and other professionals. Finally, an assessment is made of the general standard of a company's governance structures.
Companies selected for the second stage generally have been long−term underperformers with a number of corporate governance weaknesses. A more in-depth investment analysis is made of each potential investee company's component businesses, the markets in which it operates, the sector-wide conditions and company−specific considerations. Sometimes this involves our commissioning an external specialist to prepare a strategic review of the company. The purpose of the analysis is to gain a thorough understanding of the company's business and operating environment and thus determine its potential value and the factors currently preventing that value being recognised in the market.
The third stage of analysis is of the governance structures and frameworks within which the company operates. In particular, we take into account the shareholder base, the structure and composition of the board of directors, the quality of management and legal and regulatory environment. On this basis we take a view on the potential for the company to change.
An inherent part of the analysis is identifying the changes that are necessary to realise the potential value of the company and determining the role that the Focus Funds could play in encouraging those changes. The penultimate step in the investment analysis process is to formulate the engagement programme necessary to produce the improved performance of which we believe the company capable.
The combined results of each stage of analysis are the basis on which a decision is taken as to whether the potential value and the potential for change are consistent with the Focus Fund model. If so, an investment proposal is submitted to the Investment Committee, which will then decide whether the company should be included in the portfolio.
