Ingé Lamprecht is worth the read on most days, I suggest. I attended the presentation to which she refers in the article, so just how lazy might I be allowing Ingé to report?  It’s I hope she has some benefit from this post. Allan. Copied here with an overall permission from the authoress. The bottom up? It’s the company that counts really. Read how she tells us.

What bottom-up investing is about

Based on an article written by  Ingé Lamprecht, published in MoneyWeb

As an investor it can often be quite difficult to navigate your way around the headlines. Making the right investment choices in an environment of quantitative easing, a changing political landscape, conflict and unrest, subdued economic growth, rising interest rates and currency volatility almost seem impossible. But how do global investment managers deal with the news flow and a situation where policies can change overnight?

While there are different investment approaches, one that is fairly common is bottom-up investing. This means that the investment manager would specifically focus on individual companies and their fundamentals and not on the macro-economic environment in which they operate. Thus economic growth rates and changes in interest rates would be largely immaterial.

Speaking at a recent Allan Gray investor roadshow, Marley Kornreich, business analyst at Orbis Investment Management, said it might be surprising that a global investment manager does not construct portfolios based on macro economic views.

But there are two reasons that inform this approach.

Kornreich said to be able to reliably and sustainably predict macro-economic trends over time is really difficult. Many factors are considered when forecasting macro-economic trends and some of these are almost impossible to determine.

This could include which politicians might come to power and what policies they might implement, she said.

But even if macro-economic trends could be predicted, they are not convinced it would be very helpful in creating value.

If there was a relationship between real gross domestic product (GDP) growth and real equity returns, hypothetically speaking, they could potentially predict which countries would experience great real GDP growth, invest in companies located in those countries and hope to see great real equity returns as a result.

But an analysis of real GDP growth and real equity returns in more than 83 countries over various time periods suggests there is very little to almost no correlation between those two factors, she said.

One such example is China. Although China has experienced considerable real GDP growth in the past, its real equity returns have been dismal.

Conversely, South Africa’s real equity returns have been fantastic, even though real GDP growth has been lackluster, she said.

Not being convinced that predicting macro-economic trends could drive value, they spend a lot of time doing fundamental bottom-up research to come to a view on the long-term intrinsic value of a company – what it is really worth over time, she said. The idea it to buy companies that are trading at a discount to what they are worth.

“And then over time we think that the market will recognise the true value of those companies and the price will rise,” she said.

But why would somebody sell a company at a discount? Kornreich said markets and people could be very irrational in the short-term.

“They might act out of fear or greed. They could get real nervous when they hear the word Ebola. They might get scared about the crisis in Ukraine and sometimes good companies get thrown out with the bad and that can create buying opportunities,” she said.

Yet, this approach is not without risk. Kornreich said the biggest risk is permanently losing capital.

To mitigate this risk a lot of research is done to truly understand how a company works before any investment is done, she said.