Identifying Structural Growth
St. Petri Capital is founded on the belief that thematic research will provide high-conviction investment ideas, better risk-adjusted returns and diversification for our clients. Through our thematic research, we differ significantly from traditional sector and country investors.
In our daily work, we focus on understanding the structural changes that are shaping current and future value chains. Having analysed the implications of structural changes, we typically define a list of 10 to 15 long and short investment themes. A potential new theme is subject to research and rolling discussions that may last from a few weeks to several months. In our research work, we consider what type of analysis validates the idea, what counterarguments and weaknesses exist and how investable the theme is. Our main goal is to invest into a theme before it becomes widely followed. While the horizon will differ across these themes, generally we remain invested between 6 and 24 months.
Eventually, each theme must be validated. We meet with 300 to 400 companies and industry specialists each year and explore new opportunities by attending field trips and conferences. Each of these interactions raise potential questions: Is the value chain changing? What expectations are currently implied in share prices? What are the catalysts that will drive future share prices? And, how does a potential new investment change the overall risk-reward profile of our portfolio?
Stock Selection Process
Essentially, a theme works as a filter for stock selection. Some 30 years of equity research has given us a broad exposure to companies and their decision makers. Once a stock meets our thematic investment criteria, the share price potential is measured through discounted cash flows.
In our models we can see the implied assumptions currently priced in. Incorporating thematic drivers into these models helps us identify the share price potential. If the potential is satisfactory versus the risk that the stock will contribute to the portfolio, and a clear catalyst can be identified, the company is added to the portfolio, either on the long or short side.
Identifying and studying themes help us select better stocks.
We have the flexibility to pursue our best ideas across sectors, market capitalization, countries and regions. Our portfolio is not risk free, however. Multi-dimensional risk management is the key part of our investment process.
Traditional risk metrics such as beta, standard deviation and correlations with other metrics help us understand and hedge the unintended risks. While specific risks may not directly affect our investment themes, they may still have an indirect impact on our fund. When backward-looking risk models are predicted with less confidence, for example in a situation of crisis, they lose their ability to forecast. Therefore, we also use pro-active risk models.
“If/when” scenarios, “maturity of themes”, correlation of themes, as well as limits on volatility are significant parts of our risk-management process. The goal is to create a portfolio that carries significantly lower risk than that of the overall market.