Our investment process has strict investment guidelines that ensures that we contain portfolio risk within specified levels and run a diversified portfolio to deliver consistent risk adjusted returns to our investors. On a bottom-up approach, we believe that company fundamentals are the primary determinants of stock performance.
In evaluating potential equity investments, we focus on the following fundamental characteristics:
In arriving at the value of business or company, we look at a variety of factors. Key focus is on trends in returns on equity and capital, EV/EBITDA multiple, P/E multiple, Price to book and PEG ratio. We examine these on an absolute as well as relative basis. While looking at these parameters we closely monitor market expectations as well to identify potential positive / negative surprises. We evaluate companies on the basis of its cash flows discounted at an appropriate rate (DCF- discounted cash flow methodology). We believe that the valuation of a company is nothing but the cash flow it can generate over the life of its business. In addition we also use other tools like P/E, ROE, ROCE and qualitative criteria like management quality.
HSBC has a proprietary investment framework based on profitability as measured by ROE versus valuation as measured by Price to Book ratio. The portfolio construction process will use this framework to screen for investment opportunities in the relevant universe and then use fundamental analysis to fine tune the inputs to arrive at an optimal mix based on sector analysts recommendations and fund manager views.