Focus on stocks whose potential CFROI® resilience has not been fully identified by the market
Our approach seeks to identify companies that can maintain high and sustainable returns over a much longer period than the market would usually expect. Strong brands, technology or innovation leadership, as well as leading market shares are some of the attributes of such companies, which enable them to build high and sustainable entry barriers. This, in turn, will help those companies beat the conventional expectations of eroding returns over time because of rising competition or industry disruption.
Shares of these “global leaders” are able to surprise the market positively by maintaining a positive spread between their Cash Flow Return on Investment CFROI® (Source: Credit Suisse HOLT) and their cost of capital (CoC) over a much longer period than the market would usually expect. They have historically outperformed the overall equity market.
A concentrated yet diversified portfolio
Academic research has shown that beyond 30 stocks, the marginal impact of each additional stock to diversification is minimal.
Portfolio risk per number of holdings
Source: Credit Suisse HOLT; UBP; Elton, E. J., & Gruber, M. J. (1977) “Risk reduction and portfolio size: An analytical Solution”. Meir Statman, analysis based on an equally weighted portfolio of random NYSE stocks.