By Stonebridge Advisors LLP / / 2 min read
Two ways to begin
There are, broadly, two places an equity investor can start. A top-down investor begins with the economy: growth, interest rates, the direction of the index and the sectors expected to benefit. Individual companies are chosen late, as a way of expressing that larger view.
A bottom-up investor begins with a single business. What does it sell, to whom, and at what margin? How much cash does it generate, and how much does it need to reinvest to keep growing? Only once the business is understood does the question of price come in.
The firm's starting point
Stonebridge Advisors LLP works bottom-up. The firm reads the accounts, understands how the company earns, and forms a view on what it is worth before it forms one on where the index is going.
In practice the unit of work is the company, not the macro call. A research note is about one business: its economics, its management, its balance sheet and the range of values that can be defended for it.
Reading the accounts in full
Financial statements are read in full, not summarised from a data screen. The notes to the accounts often say more than the headline numbers: how revenue is recognised, what is owed and to whom, which transactions involve related parties, and how all of that has changed over time.
Reading this way is slow, and it is meant to be. It is the step that separates a business that reports good numbers from one that earns them.
Where the wider economy still matters
Bottom-up does not mean the economy is ignored. It means the economy is considered through a specific business. The firm's process includes a sector assessment: where the sector sits in its own cycle, what is driving demand, and whether a tailwind is structural or temporary.
The difference is the order of the questions. A good business in a difficult cycle can still be worth owning at the right price. A weak business does not become a good one because its sector is in favour.
What the approach asks for
Working bottom-up asks for patience. The market can take a long time to recognise what the accounts already show, and a view formed on the business has to be held through periods when the index is moving the other way.
That is why it sits alongside the firm's other principles, which are set out on the approach page. None of them is a promise about returns. Investment in the Fund carries risk, including the possible loss of capital, and there is no assurance of return.
An educational note
This article is published for education and general information. It is not investment, legal or tax advice, and it is not an offer or a solicitation. Units in Anchor Rock Investment Fund - I are offered only by private placement to eligible investors, and the terms of the Fund are set out solely in the Private Placement Memorandum. Read the disclosures.