Investment process

Our process incorporates the more helpful elements of modern portfolio theory (MPT) such as diversification of asset classes and mitigating the risks of asset correlation. We then use proprietary research, analysis and modelling to improve client outcomes by replacing the less effective elements of MPT (a reliance on the past performance of asset classes, the static nature of the MPT portfolio) with a more appropriate, forward-looking and dynamic approach.

The Thesis investment process results from the input of four investment committees to the Asset Allocation Committee, which then determines overall asset allocation. From this initial allocation, we derive seven model portfolios, each designed to target a different level of potential risk and return.

The four investment committees (UK Equity, Fixed Interest, Pooled Vehicles and Ethical) meet monthly and on an ad-hoc basis if required. Research for the committees is conducted in-house by our own research department.

For UK equities, Thesis uses a proprietary stock screening process called TESS (Thesis Equity Stock Screen). The screen is designed to help us to include stock winners and avoid losers among the stock selections that we include in portfolios. The system has been developed and tested by our senior investment team and research department, in conjunction with Cranfield University.

TESS is not a black box or algorithmic based system. It is a screening process based on six matrices pertinent to stock selection: dividend yield, earnings, earnings to price, EBITDA to sales (a measure of a company’s operating cash flow), return on assets and prior year’s total return (share price movement and dividend).

Rigorous back-testing indicates that the use of this stock screening process would have delivered outperformance over the past ten years. It is a data mining system which allows us to identify stocks to include in the portfolios and, most importantly, to avoid those predicted to underperform significantly.

Our fund selection involves a comprehensive, quantitative and qualitative screening process based on a four step approach.

  • Analysis of style and peer group, absolute and risk-adjusted performance over a range of time periods. The quantitative screening process usually eliminates around 80% to 85% of the peer group
  • Published information is collated and meetings held with the fund manager to assess a variety of factors, including the investment culture of the management group; the style, consistency and experience of the fund manager, their investment process and any other responsibilities they hold alongside their fund management duties; and fund specific considerations such as size, liquidity, fees, gearing and diversity of ownership
  • The Pooled Vehicles Committee reviews the quantitative and qualitative analysis and debates the merits of the fund before determining acceptance onto the buy list. The committee comprises portfolio managers and research analysts
  • Funds are continually monitored and monthly performance figures are calculated and reviewed. Funds that significantly underperform or experience a substantial change in style or management are automatically put on watch pending investigation and a decision by the committee

Liquidity is an important consideration in our investment selection, and we aim to purchase only assets that can be traded daily. Investments with less frequent dealing would only be used if no comparable investment with daily liquidity is available, and investments with holding period restrictions are generally not considered.

Each risk mandate does not use a pro-rata replica of the same fund weightings, rather the risk level of the blend of funds used at each level is targeted to be appropriate for that mandate. Our fund research team has designed a sophisticated proprietary blending tool used to optimise the recommended selection and weighting of the funds on our buy list for each mandate.