INVESTMENT PHILOSOPHY

Intellectual Framework

The investment philosophy of Peters MacGregor Capital Management has been developed from the teachings of Benjamin Graham, Philip Fisher, Warren Buffett and Charles Munger.

Share selection

First and foremost, Peters MacGregor Capital Management views an investment in a company's shares as an investment in the company's business. Its approach to share selection is the approach it would adopt if it were seeking to purchase the entire business.

In essence, Peters MacGregor Capital Management looks for businesses with a durable competitive advantage run by people who will maintain and/or improve on that advantage. In order to assess these attributes, Peters MacGregor Capital Management remains focused on businesses it understands. It places a heavy weight on high probabilities and does not diversify its share holdings into industries and companies it does not understand.

Peters MacGregor Capital Management's time is not spent trying to guess which way the market may move and it is not an active trader. It believes that stock markets will be far more volatile than the underlying businesses they represent.

The investment selection process is 'bottom-up' and research intensive. The investment process is implemented by an experienced team of analysts who follow a clearly defined and distinct investment strategy and have a successful long term performance record. The investment process of identifying opportunities is focused on three key areas, as outlined in the diagram that follows:

Time horizon

Peters MacGregor Capital Management will only buy a share if it is prepared to hold it for at least ten years. Peters MacGregor Capital Management believes the share market is not a place to invest if your time horizon is less than five years. Holding shares for the long term allows compounding of returns and minimises frictional costs such as capital gains taxes.

Diversification

Peters MacGregor Capital Management only invests in a small number of businesses (no more than 20). This focused approach enables it to thoroughly understand the businesses in which it invests.

Theory (Richard A. Brealey - An Introduction to Risk and Return from Common Stocks) suggests that a 12 share portfolio can provide 90% of portfolio diversification benefit if each is in a different industry. With 5 shares, 77% of that benefit is achieved.

The following are direct quotes and present our case for a focused portfolio more eloquently then we could:

Warren Buffett: "If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk." The Essays of Warren Buffett p80

Charles Munger: "We believe that almost all really good investment records will involve relatively little diversification. The basic idea that it was hard to find good investments and that you wanted to be in good investments, and therefore, you'd just find a few of them that you knew a lot about and concentrate on those seemed to me such an obviously good idea. And indeed, it's proven to be an obviously good idea. Yet 98% of the investing world doesn't follow it. That's been good for us." Berkshire Annual Meeting 2004

John Maynard Keynes: "As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one knows something about... It is a mistake to think that one limits risk by spreading too much between enterprises about which one knows little and has no reason for special confidence..."

Risk

There are two types of risk that are of key importance to Peters MacGregor Capital Management, business risk and price risk.

Selecting businesses with competitive advantage, sound economics, competent management and bright futures can substantially reduce business risk. By focusing on businesses within its circle of competence, Peters MacGregor Capital Management seeks to minimise unknown factors and maximise potential returns.

Price risk enters the equation if too much is paid for a business, even where it is an excellent business. This is why Peters MacGregor Capital Management insists on a reasonable 'margin of safety'.

Margin of safety

Each business is valued by Peters MacGregor Capital Management on a discounted free cash flow basis, and an investment is made only if the share price is at least 25% below this assessed value range. This is Peters MacGregor Capital Management's 'margin of safety' and is critical in protecting its clients' capital and achieving high returns.

This price-value relationship is an important concept. Price is what you pay and value is what you receive. Peters MacGregor Capital Management believes that over time a company's share price will trend toward its true value.

So investments it makes have two powerful factors working simultaneously: the value of the business is growing while the share price is "playing catchup" to this value.

Portfolio construction

Peters MacGregor Capital Management's focused and long term investment methodology is based on a 'bottom-up' stock picking approach.

The objective is to identify outstanding businesses that are trading at material discounts to assessed valuations.

The portfolios will comprise a small number of individual stock selections. Investment weightings will be primarily determined by the Investment Manager's assessment of quality of business and the prevailing margin of safety. Peters MacGregor Capital Management does not utilise 'top down' macro asset allocation models. As a result, investment weightings will not resemble common benchmark indices (such as the MSCI).

It is likely that a material part of the portfolio will comprise securities quoted on overseas markets which are denominated in foreign currency. Peters MacGregor Capital Management actively manages the foreign exchange exposure and utilises forward purchase contracts for foreign exchange, to hedge some or all of the portfolio's exposure to exchange rates.