Time horizon is the key market imperfection.
Owing to the structure of the market and the way in which most portfolio managers tend to operate, investors spend too much time focusing on short-term quarterly and annual data. Detailed empirical research on markets undertaken by our investment manager strongly indicates that company analysis should be concentrated on a longer-term, five-year horizon.
Company analysis is the most important activity our Portfolio Manager Craig Armour and the rest of Edinburgh Partners’ investment team undertakes. Forecasting a company’s prospects on a five-year time horizon is not easy and to be successful, they need skill and experience. Their investment approach is long-term and focused on absolute valuation. They believe that adequately diversified, concentrated portfolios have the highest probability of generating good absolute returns.
They aim to identify and buy undervalued companies, and have the patience to hold them until share prices reflect their long-term earnings potential. Instead of being pushed off-course by short-term reactions, fear of being different from the crowd or a particular index, their judgements are based purely on long-term analysis of prospective risk and reward. The approach is often contrarian but for the patient investor they believe that it is the most reliable way to achieve superior absolute returns.
The value of the shares and any income derived from them can fall as well as rise, and investors may not get back the full value of their investment.
The portfolio is likely to be more concentrated than that of other similar companies and the share price and NAV are therefore likely to be more volatile than other more diversified portfolios.