An analyst and portfolio manager of the Pan-Tribal Global Equity Fund believes there is no such thing as a 'must own' company.
Sharing the view at a recent Pan-Tribal lunch for advisers, Danton Goei of Davis Advisors said investors can get caught up in the hype perpetuated by companies and markets.
Goei said it is important to look beyond a company's headline numbers - and while the price-earnings ratio (P/E ratio) is fine - the two things wrong with it are the P and E separately.
His price example is car manufacturer General Motors in 2008, when it had US$58.4 million in underfunded pension and healthcare entitlements; however, this liability was not reflected in its price or earnings numbers.
"The share price generally does not include debt, underfunded pensions or healthcare entitlements," Goei said.
"It's important to make these key adjustments to a company's financials to get a true picture of a business. In 2008, GM was really owned by retirees and its employees rather than shareholders."
He added that analysts at Davis Advisors adjust earnings for a range of factors. Goei explained, for example, that there are two types of accounting practices used. The standard practice generally expenses items as costs are incurred, and books profits as they are made. The alternative is program accounting, where expected sales over a specific time are estimated, together with expected costs and, from there, the average profit the company will book each year is calculated - even for year one.
"Program accounting represents a long-term view - but how can an organisation really know how many sales they will make and at what cost?" Goei said.
"There can be quite a difference in reported profitability, depending on the accounting methodology adopted."
Valuation is not the only important consideration for Davis; their investment approach also looks for quality businesses with a durable competitive advantage, as well as quality management with a track record of sound capital allocation.
The Pan-Tribal Global Equity Fund, managed by Davis Advisors, currently invests in 51 companies across 13 countries. While regional factors are an important input into stock selection, the strategy that underpins the fund is a fundamentals-based, unconstrained approach, with bottom-up research conducted in-house. The portfolio holdings represent high conviction ideas from a universe of global investment opportunities.
The fund recently passed $30 million in funds under management and both Lonsec and Zenith have upgraded its rating in the past few months. It is available through most of the major platforms.