Emerging Markets Process
In order to be considered for the portfolio, a security goes through Champlain’s four-step investment process. The first step is to apply a discriminating front-end filter to the starting universe; this filter is based on both the strategy’s market cap and liquidity parameters, as well qualitative criteria designed to eliminate the types of business models we want to avoid such as those with high cyclicality, burdensome state ownership, or onerous regulation.
The next step is to apply our sector factors - a set of qualitative judgments that target the business models we find most attractive. We have specific factors for each of the five most dynamic and typically fastest-growing sectors: consumer, financial services, health care, industrials, and technology.
The third step is the analyst’s fundamental analysis of company attributes. During this stage we aim to understand the business model, its cash flow, the capability and sincerity of its management, and its competitive landscape.
The final phase of the process is the valuation analysis – here the team takes a multi-faceted approach to security valuation that includes discounted cash flow analysis, historical valuation analysis, peer group valuation, and, when appropriate, strategic value/M&A data.
Once a security has gone through these four phases, the analyst presents the idea at the weekly team meeting for discussion around potential inclusion in the portfolio. Research materials are distributed prior to the meeting to ensure the whole team is prepared to debate the merits of the business model, competitive environment, valuation, and potential fit within the portfolio. If the security is going to be included in the portfolio, the team will also discuss entry strategy and the position size.
We sell securities when the stock price exceeds our Fair Value estimate of the business, when we find better opportunities for shareholder capital, or when we have made a mistake. We also look to trim securities when the position size approaches our guideline maximum.