Once Beulah has assessed the short and long term risks of the opportunities available, a filtering process is applied to derive a group of securities based on the selection criteria and investment process.
Utilising the criteria outlined below, Beulah uses modelling and analysis software that will assist it in developing a group of securities suitable for inclusion within the Australian equity component of the Model Portfolios.
The investment selection process centres around three main criteria:
Beulah looks for industries that are likely to provide investors with above average returns over the longer term. Beulah believes that the industry structure is the most important determinant of the profitability of a company and is therefore the most appropriate place to commence the investment process. Even the most competent corporate team will find it difficult to provide superior results if they are operating in an unprofitable industry. Beulah are attracted to industries that have high barriers to entry or defendable market positions, minimal competition, low threat of substitutes, pricing power over their customers and bargaining power over their suppliers.
Beulah looks for companies that are simple and easy to understand. Beulah believes that investing into businesses that are complex and cannot be fully understood is speculating and not investing. Beulah looks for a business that has a sustainable competitive advantage and high barriers to entry. If a good quality business can be found, that has a defendable market position in an attractive industry, Beulah believes the potential for above average returns over the longer term is far greater.
Beulah also looks for a management team that is passionate, intelligent, honest, frugal and rational. Given the emphasis on capital preservation, Beulah places a higher level of importance on analysing the potential business risks and likely impact of unforeseen events.
If the business meets the qualitative criteria, Beulah will refer it to the next stage of the investment process.
Beulah applies a range of valuation methods to assess whether a company is attractively priced. It utilises a discounted cash flow approach as well as other tools such as absolute and relative PE ratios, free cash flow analysis and dividend yield support to determine value. Beulah looks for companies that are able to achieve an attractive return on equity and are forecast to generate attractive earnings growth over at least the next three years.
Quality companies are typically sought after by the market and therefore tend to trade at high market valuations. Beulah believes it is important to be disciplined and wait patiently for an opportunity to arise to purchase a company at an attractive price.