Dalton Nicol Reid receives Recommended Rating

Tuesday, December 04 2012

Independent Australian investment management company, Dalton Nicol Reid has been awarded a ‘Recommended’ rating for its highly successful Australian Equities High Conviction portfolio, from asset and investment management consultants, Atchison Consultants.

The Dalton Nicol Reid Australian Equities High Conviction portfolio is managed by six full time staff, including Jamie Nicol, Chief Investment Officer and Scott Bender, Portfolio Manager. The team is also supported by two independent consultants, taking the total investment team to eight.

CEO and Director, Harley Dalton, said the result was pleasing as it recognised the strength of the investment team’s experience and investment strategy.

“This is the third time our capability has been reviewed by an asset consultant and it is pleasing to achieve another strong result. We believe our investment approach and performance track record in difficult market conditions, is now well proven. We are continuing to expand our investor base and this rating is another step in that process,” Mr Dalton said.

Among the strengths of the capability, Atchison Consultants pointed towards the stable investment management team and a proven investment process tested over the complete investment cycle.

Dalton Nicol Reid’s independent Investment Committee member oversight was seen as a positive, to ensure rigour around the investment process. Atchison’s also noted that the low turnover of stocks and concentrated portfolio made the offering suitable for an SMA model given it minimises trading costs and is relatively tax efficient.

Mr Dalton said “Dalton Nicol Reid was established in 2001 and the Australian Equities High Conviction portfolio has returned 12.1 per cent p.a. over 10 years to October 2012. Our investment style is based on buying quality stocks at reasonable prices and not deviating from this fundamental view has been the key to our success through the cycle. Couple this with a stable investment team for 10 years and we have put ourselves in a strong position to consistently outperform.”

“We currently manage more than $400 million for retail, institutional and wholesale investors.”

Dalton Nicol Reid uses a five-point quality matrix to identify relative quality of listed companies. This includes balance sheet assessment, industry structure, management strength, earnings strength and ESG (environmental, social and governance). Mr Dalton said there is a growing body of evidence that supports ‘quality’ investing.

“Research on quality investing has largely focused on the back testing of various quality screens to determine the impact of quality on returns. On the whole, this research has shown a strong linkage between quality and performance over the medium and long term.”

“A quality portfolio will be agnostic to value or growth. Following a quality investment approach allows us to identify companies that are mispriced by overlaying this quality filter with a strong valuation discipline. It also allows us to enhance returns by identifying companies when they are out of favour.”


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About Dalton Nicol Reid

Dalton Nicol Reid is an independent Australian investment management company that delivers client-focused, quality investment solutions to institutions, intermediaries and high net worth investors. The basic foundation of the business is to our clients’ needs first and provide them with an unparalleled level of service, be they institutions or individual investors.

Dalton Nicol Reid has a rigorous investment process proven through various market cycles and our client-oriented Individually Managed Accounts (IMAs) and Separately Managed Accounts (SMAs) solutions are pioneering developments within Australian financial markets.


About Quality Investing

In Dalton Nicol Reid’s view the following reasons help explain why quality companies outperform:

Quality companies generate more capital that can be reinvested to drive sustainable returns over time. This can be achieved via appropriate deployment of capital either internally or via M&A.

  • Companies in structurally superior industries with pricing power can grow above CPI and are more protected against inflation.
  • Higher quality balance sheets help to ride out cycles.
  • The ability to value quality companies is enhanced by the sustainability of earnings. So quality companies will tend to trade at a premium.
  • Quality companies tend to recognise the benefits of good ESG policy. As financial analysts tend to ignore ESG risks in terms of valuing companies and identifying risks, these benefits are often understated.

The concept was first recognized in the 1930s by Benjamin Graham, who classified stocks as either high or low quality. Mr Graham found that the greatest losses resulted not from buying quality at an excessively high price, but from buying low quality at a price that seemed good value.

Another celebrated study was by conducted by University of Chicago Accounting Professor, Joseph Piotroski (2000) who reasoned that because value stocks are by definition often troubled companies, many will not possess the financial resources to recover. Consequently, Piotroski wondered if it was possible to improve the performance of a value stock portfolio by eliminating stocks that were the weakest financially.

Piotroski devised a simple nine-criteria stock-scoring system, called FSCORE, for evaluating a stock’s financial strength that could be determined using data solely from financial statements. His findings were that these strong stocks as a group outperformed a portfolio of all value stocks by 7.5% annually over a 20-year test period. Piotroski also found that weak stocks, scoring two points or fewer, were five times more likely to either go bankrupt or delist due to financial problems.

The Piotroski’s scoring system gave one point if a stock passes each test and zero if it did not. The basis was as follows:

  1. Net Income: Bottom line. Score 1 if last year net income is positive.
  2. Operating Cash Flow: A better earnings gauge. Score 1 if last year cash flow is positive.
  3. Return On Assets: Measures Profitability. Score 1 if last year ROA exceeds prior-year ROA.
  4. Quality of Earnings: Warns of Accounting Tricks. Score 1 if last year operating cash flow exceeds net income.
  5. Long-Term Debt vs. Assets: Is Debt decreasing? Score 1 if the ratio of long-term debt to assets is down from the year-ago value. (If LTD is zero but assets are increasing, score 1 anyway.)
  6. Current Ratio: Measures increasing working capital. Score 1 if CR has increased from the prior year.
  7. Shares Outstanding: A measure of potential dilution. Score 1 if the number of shares outstanding is no greater than the year-ago figure.
  8. Gross Margin: A measure of improving competitive position. Score 1 if full-year GM exceeds the prior-year GM.
  9. Asset Turnover: Measures productivity. Score 1 if the percentage increase in sales exceeds the percentage increase in total assets.


IMPORTANT NOTE: This information has been prepared by DNR AFSL Pty Ltd ABN 39 118 946 400, an Australian Financial Services Licensee, Licence Number 301658. Whilst, Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This document is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this document. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s model portfolio and have been calculated before taking Dalton Nicol Reid’s fees into account. No allowance has been made for taxation.
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