CONTEXTUAL VALUE INVESTING



Our investment goal is to deliver consistent long-run real returns in excess of the risk free rate on a risk-adjusted basis. Risk-adjusted, to us, means taking drawdown risk into account as this is of cardinal importance. Our thinking in times of uncertainty is to err on the side of caution, which means we would focus on controlling risk at the expense of return. We could thus be arguably labeled as defensive investors, placing emphasis on capital preservation at the expense of seeking risky returns in uncertain or volatile times. This means trying to avoid the big pitfalls, to avoid the big mistakes. Expressed differently, it is important that the portfolios we manage do not give back gains symmetrically when the market turns down.

The principle of value investing involves the buying of shares when they offer value against a metric such as net asset value, and then selling that same share when it significantly exceeds its net asset value. Generally, these valuation swings are a result of factors that include short term stresses in the market and the emotion of investors and their reaction to various events.

Counterpoint Asset Management aligns itself with value investing. However, we believe that a share trading below its fair value needs to be assessed against the broad macro environment to ensure that it is indeed cheap given the current circumstances and factors at play in the market.

A cheap share may be cheap for good reason. In these situations a cheap stock can remain cheap until the macro environment allows the share to re-rate. In addition, holding cheap shares in a structurally negative environment increases the opportunity cost of holding other shares that may not be as cheap, but that may have a better re-rating opportunity. Value can therefore not be assessed in isolation of the investing environment at the time; in addition one has to take note of the context in which value is assessed.

We call this approach Contextual Value Investing, best describing our investment style. This investment style requires a good understanding of company specific drivers as well as key economic and market factors that influence that company. All these factors determine Contextual Value.

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