Our investment ideas mainly arise from being aware of developments in markets, reading widely, and maintaining a somewhat contrarian mindset. We tend to find opportunities in areas of markets towards which there is clearly visible aversion by the general market, which is being ignored, or has been neglected, by the general market, or which is more complicated to analyse and requires deeper research than what the average market participant is willing to engage in. We also actively seek out situations where human judgement and understanding is important in assessing an opportunity, as opposed to situations which readily lend themselves to quantitative analysis by computers.

We rarely screen markets systematically but do so when we are building an understanding of a market with which we are not yet familiar. We employ a simple screening tool that gives us an overview of the business model, long-term economics and long-term valuation ratios of a company. This serves to narrow our focus to a group of stocks on which to do deeper fundamental research.

The scope of the fundamental research we conduct can vary considerably depending on the nature of the situation. In some cases, studying the published investor material of a company will be sufficient. In other cases, discussing the business with management will be useful. Often – especially in unfamiliar markets – drawing on the knowledge of local or industry experts is necessary. We source these experts either via personal relationships, or through paid expert networks. We make limited use of sell-side research but do find it useful on occasion – notably to gain an understanding of the industry landscape in which a company finds itself.

As fundamental, valuation-based investors, the main objective of the research process on a new idea is to determine a reasonable fair value for the asset in question. Our initial research may conclude with the assessment that we cannot establish fair value for the asset with sufficient confidence, in which case we move on to other ideas.

If the analyst in question feels that he/she can estimate the fair value of the asset with some level of reliability, and he/she feels the asset can add value to the Rozendal funds, he/she is tasked with writing a report on the investment idea.

The analyst proposing the investment idea is obliged to capture his/her key thoughts and conclusions about the asset in question in a written report. We use a report template that includes a snapshot of the current financial and market metrics of the company, the financial history of the company, and a long-term comparison of the company with its peers. The key objectives of the report are to:

1. Demonstrate a sufficient understanding of the underlying economics of the asset to establish a reasonable fair value for the asset – recognising that fair value is not an exact number.
2. Demonstrate an understanding of why the asset is mispriced, and why our view of the fair value of the asset differs from the market’s view thereof.

Depending on the nature of the investment opportunity, the report may consist of a single written page, or stretch into tens of pages.

The written report is submitted to the rest of the investment team. Investment team members have an opportunity to assess the idea and submit questions to the author in writing. The analyst in turn is expected to answer the questions submitted, also in writing.

Once this process has been concluded, the investment idea is added to the approved list. The approved list captures all the assets about which we feel we can make an informed investment decision.

The analyst responsible for the investment idea is tasked with keeping up to date with developments in the asset. The primary objective in this process is to keep the rest of the team updated if the analyst’s estimate of the fair value of the asset changes.

Although the Rozendal Partners investment team is small and there is ample opportunity for informal verbal engagement on an idea or asset, analysts communicate their ongoing thoughts and relevant information about an asset to the team in writing. This serves as a useful record of thoughts and decision making over time, which aids in ex-post evaluations of investment outcomes.

Once an asset has been included in the approved list, portfolio managers are free to buy and sell the asset according to their best judgement – within the limits of mandate constraints₁. The Rozendal Partners funds are managed on a co-portfolio manager or multi-counsellor basis: each portfolio manager is responsible for his or her pro-rata share of the capital of the funds₂. An investor in a Rozendal Partners fund receives the weighted average outcome of each portfolio manager’s investment decisions.

Typically, the following considerations will guide portfolio construction:

1. Maximum position size in an equity investment (or in an asset carrying equity-like risk) will typically be around 10%. Where circumstances demand, position sizes may exceed this. For instance, engaging in arbitrage strategies or stub investments often necessitates substantially larger investments.
2. We don’t shy away from concentration in compelling investments but do prefer portfolio diversification across risk and return streams. Geographical and industry sector allocation is something that is considered in portfolio construction, but there are no explicit constraints thereon.
3. Whilst the price to value relationship of an asset is of paramount importance in portfolio managers’ investment decision making, other considerations are also relevant in the buying and selling decisions. Examples of these are:
   • The presence or absence of tangible catalysts that are likely to unlock value in an investment.
   • The actions of insiders in buying and selling shares of a company.
   • Industry cycles and where the industry finds itself in the cycle.
   • Historical quantitative base rates for factors and how the asset rates on these. In this regard, momentum is of particular interest. Valuation based investors are prone to succumbing to ‘value traps₃’. An awareness of momentum in portfolio construction ameliorates this tendency.

Portfolio construction is by design not subject to material constraints. Incentives drive behaviour. In Rozendal Partners, the emphasis is on appropriate incentivisation and alignment of interests as a tool to drive appropriate behaviour (and by extension portfolio construction). We avoid subjecting portfolio managers to onerous explicit constraints in their investment decisions. We believe this is far more likely to result in the positive long-term outcomes that we seek to achieve than attempting to micro-manage every aspect of the investment decision making process.

After the completion of an investment cycle, we compile our experience in a written essay that we publish in our six-monthly investor letter. This essay serves a dual purpose:

1. It gives us an opportunity to learn from the experience. By reviewing our thoughts and decisions over the course of the investment cycle, we can take lessons from the experience to improve our investment decision making or process.
2. As a firm, we strive to create an environment in which portfolio managers have the best possible opportunity to make rational investment decisions. Publicly proclaiming a view on any topic – including an investment idea – evokes a bias in humans to act consistently with that public statement and serves to anchor thoughts and actions to that view. This jeopardises rational decision making. As much as we welcome and seek out engagement, input, and criticism of our investment ideas, we avoid expounding the virtues of our investment ideas too loudly in public. This should serve to give portfolio managers a better chance of making rational investment decisions. However, we also want to give our fellow investors as much transparency and insight into our thought processes and investment decisions as possible. We aim to achieve this by way of the published reviews in our investor letters.

As should be evident from this description, our investment process aims to give portfolio managers the best possible opportunity to apply sound judgement to make informed and rational investment decisions. Our focus is on creating an environment for such decision making to flourish – processes and procedures cannot substitute for sound judgement thoughtfully applied.