Our Three-Stage Process Is Based in Fundamental Research
Fundamental Analysis: To narrow down our universe of stocks, we start off with various quant screens and factor-based screens to identify potential investments. But quant screening is very limited. It's backwards looking, doesn't adjust well to incorporate forward-looking information, and simply can't adjust for other factors such as management interpretation of loose accounting rules. It's good for generating potential ideas, but all the important work comes afterwards through fundamental forward-looking analysis. By reviewing macroeconomic factors, industry trends and company-specific issues, we assess each firm's forward-looking potential based on its strengths, opportunities, risks and weaknesses. We look for growth and sustainability in adjusted cash flows to support value. While some other research firms incorporate fundamental analysis, it's what we do afterwards that ensures that our interests are completely aligned with yours.
Independence Screen: Unfortunately, investment banking activity taints most of the research available from the sell-side. Our analysis shows that companies are 40% more likely to be rated as a Buy by brokers that are receiving fees from those same companies for underwriting services. ARC is free from any outside influence. As part of our value-added process we screen out the companies that we think receive more favourable recommendations due to investment banking activity and other conflicts of interest.
Forensic Accounting Analysis: We validate the integrity of the financial statements because confidence in the numbers behind your investments is paramount. If investors can't trust the numbers behind the research or quant-based process that they're using, it doesn't matter what industry, sector or company is being analyzed. We delve deep into the financial statements to flush out potential threats, and also to identify investment opportunities hidden by complex or inadequate financial reporting.
First Step: Fundamental Analysis