The most effective risk management disciplines are those that seek to identify problems before they happen.
Low risk entry
We place great emphasis on rigorous research focusing on key steps including management quality, thorough investigation of the insights we seek to play and valuation analysis.
To assists us we use proprietary software which calculates Rate of Change (ROC) as a measure of a stock being overbought/oversold with statistical thresholds varying for each stock according to its technical "strength".
We operate stop losses at three different levels.
- We operate a portfolio stop loss which is consistent with the aim of limiting annual drawdowns to 1/3rd of any market down move (Beta 0.3).
- Theme level stop losses. The maximum drawdown of any fund can be allocated to each theme/sub-theme on the basis of volatility. We calculate volatility of the themes using a VAR calculation.
- Stock level stop losses. With stock level stop losses we look for evidence that the stock has broken down or is about to break down technically - this usually signals something wrong with the stock (e.g. insider selling).