Above the Index (ATI) Asset Management Pty Ltd was established in September 2004 as a boutique Australian equity manager, specialising in the manufacturing of long only Australian equity portfolios. ATI's investment style utilises a relative value methodology.

ATI was appointed by Zurich Financial Services Australia Pty Ltd in September 2008 to manage its Australian Value Share Fund. ATI currently manages the Zurich Australian Value Share Fund and is a manager within the Zurich Balanced Fund.

OneVue Limited, formerly Direct Portfolio Services Ltd, appointed ATI as the manager of their in house portfolio mandates in 2005 making ATI responsible for the stock selection, portfolio management and performance of the OneVue Managed Account model portfolios (formerly DirectPortfolio and ShareInvest).

ATI's Investment Style

ATI's investment style is premised on a relative value methodology, meaning that investments are generally purchased and held as long as they represent relatively good value. In essence, ATI focuses on selecting those companies whose share prices appear cheap relative to the universe of stocks and the GICS industry sector that they are in. The ATI relative value approach applies at both the GICS sector level and the investment grade universe level.

ATI's broad investment philosophy is that structured and disciplined active management of its portfolios is the key to consistent and risk controlled outperformance. ATI's investment style is strongly based on the relationship between forecast earnings, relative market rating (RMR) and the current share price. The time horizon for forecast return calculations is three years. ATI's investment style can broadly be characterised as:

• Active with a contrarian approach
• Bottom up using conservative assumptions
• Long term investment horizon
• Low turnover
• Focused on buying stocks identified as relatively undervalued
• Broad coverage – large to small capitalisation stocks
• High targeted alpha from benchmark out-performance
• Process driven, disciplined methodology in stock selection and risk management
• Intensive use of technology to identify specific areas for value-add research

ATI's competitive advantage

ATI sees its competitive advantage as being able to add value for clients by portfolio out-performance that arises from adding alpha (expected benchmark out performance) subject to appropriate risk constraints. Given its disciplined investment process, in-built risk controls and client management systems, ATI can manage individual portfolios for clients. This could encompass changes with regard to levels of acceptable tracking error, portfolio concentration, specific risk and fund size profiles to complement other managers.

ATI believes that its proprietary process of disciplined investing and prudent risk management will lead to superior returns and lower volatility in the long-term. Its primary focus is to deliver consistently higher than benchmark returns over rolling three-year periods with absolute volatility at, or lower than, benchmark and competitors.

The ATI Investment Process

The ATI investment process utilises relative value in the selection of the most attractive ranked stocks combined with an analytical portfolio overlay to ensure adequate diversification and risk control. ATI's proprietary Equity Ranking System (ERS) produces an ordinal ranking of a universe of investment grade stocks available for portfolio inclusion.

ATI utilises a four stage investment process that provides the framework for portfolio construction to be consistent with its investment philosophy.

Stage 1: ERS Data Collation
The data collation stage involves updating individual stock data held within the ERS. The data comes from the
following sources:

• ATI research models: provide internal forecast earnings, dividend and valuation data on companies
  researched by the ATI analysts.
• Thompson Financial Data: provides updated consensus earnings and broker history databases (IBES).
• Stock broker databases: A panel of 14 stockbrokers provides ATI their research databases in electronic form on a weekly basis.
• IRESS: provides the live ASX pricing feed, historical market and company data, and GICS sector and stock index weightings.

Stage 2: Universe Filtered
ATI's initial universe is the S&P/ASX 300 Index, and other companies added by the investment team in specific circumstances (eg. new floats). Stage 2 filters the initial universe to derive a prospective grade stock universe based on:

Minimum Liquidity Test
A liquidity test filter (based on turnover and target weighting) is applied to all stocks in the initial universe to ensure a stock has sufficiently liquidity in order to be considered investment grade.

Minimum Market Capitalisation Test
ATI removes all those stocks from the initial universe where the market capitalisation is less than $100m. Stocks below this minimum threshold can only be considered investment grade by the investment team if ATI has an internal financial model that supports the forecast return.

Minimum Earnings Test
ATI removes all those stocks from the initial universe where there is more than one negative EPS year in the forecast period (3 years) used for valuation purposes.

Minimum Earnings Source Test
ATI removes all those stocks from the initial universe where there are less than three earnings data sources. Three data sources (including ATI models) provide ATI analysts with an indication of the earnings dispersion of the earnings forecasts for the company.

Stage 3: Stocks ranked using the ERS
Approximately 120 stocks are screened out due to liquidity; negative EPS; minimum earnings sources and minimum market capitalization. Each of the remaining ~180 ”prospective grade“ stocks are reviewed by the ATI analysts to ratify the EPS, the RMR and the QAS score to be used within the ERS.

For each of these ~180 stocks a P&L, Cashflow statement and Balance sheet for the company are produced based on the chosen earnings source (consensus, broker or ATI) from which scenario analysis is conducted enabling the analyst to determine the impact on EPS when changing factors such as: Sales growth; EBIT margin; Tax rate; D&A / Sales, Net capex / Sales; Inventory / Sales; Receivables/ Sales; Payables /Sales; net interest, Commodity price and FX assumptions.

More detailed analysis is conducted on companies that ATI feels there is a gap in the understanding by the market, are under researched or where the analysis conducted above is not (in ATI's opinion) comprehensive enough. Analyst time is allocated to conduct more intensive analysis of these types of companies and involves further ‘modeling' of the company that is more comprehensive than that above.

Analysts are also responsible for determining a qualitative assessment score (QAS) for each prospective grade stock. ATI utilises its proprietary QAS framework to assist analysts in determining some of the key drivers impacting a stocks valuation and the integrity of the earnings being used in the ERS.

The qualitative assessment score (QAS) involves an extensive qualitative analytical review that takes into account:

• Key industry drivers (Porter analysis);
• Key performance statistics obtained from financial data (ratio analysis);
• Balance sheet strength, gearing levels and interest cover capacity (debt analysis);
• Management ability and industry track record/experience (management analysis);
• Current valuation in absolute and relative measures (valuation analysis); and
• Key current issues (corporate analysis, ESG issues).

The QAS analysis is utilised in conjunction with company fundamental analysis enabling ATI analysts to identify the key issues that are relevant to the specific stock and assist them to determine whether or not a ‘prospective grade' stock is ‘investment grade'. The overall review assists in screening out certain stocks that have a less attractive profile relative to other stocks in the same GICS sector and other stocks in the investment grade universe. The QAS enables stocks to be compared relative to the rest of the universe of stocks and also the specific GICS sector that the company is in. It assists in determining the relative attractiveness of the company in a disciplined manner.

The remaining stocks are considered the investment grade universe. An ordinal ranking of the investment grade stocks is subsequently produced by the ERS.

The research review process, conducted by the ATI investment team, includes an in-depth assessment of the prospective stock's financial history, balance sheet strength, future earnings prospects, historical and implied relative market return (RMR), management ability and key valuation drivers.

A theoretical target price, taking into account capital and income components, is generated for each stock in the investment grade universe by capitalising the 3-year time weighted EPS by the RMR. The target price is then compared to the current share price to produce an internal rate of return (IRR).

The ERS then produces an ordinal ranking list of the investment grade stocks based on IRRs . The ERS allows ATI to direct its dedicated research effort to stocks of relative value as well as being a sell indicator tool for those stocks that show relative unattractive IRRs. This list forms the basis for the portfolio construction stage.

Stage 4: Portfolio Construction
The ERS rankings provide the basis for the construction of robust, risk aware portfolios, sensitive to tracking error, stock positioning and client specific guideline considerations. The Portfolio Committee oversees the portfolio construction process and is responsible for the buy/sell decisions for each of the ATI portfolios.

ATI adopts a dedicated portfolio approach, selecting a theoretical model portfolio for each product from the most attractive of potential investments, wherever possible. The objective of the portfolio construction process is to create portfolios which conform to (and optimise) the conclusions of the previous three stages of the process. ATI's management of equity portfolios is based on a model concept so that a common weighting of stocks is consistently applied to all similar equity portfolios, subject to model portoflio restrictions. The typical pre-set constraints that ATI uses are:

Pre-trade and post-trade compliance checking and dealing are undertaken using IRESS, in-house systems and the custodians.

Disclaimer

The advice on this page is general financial product advice only that has been prepared without taking into account client objectives, their financial situation or needs. Before acting upon this advice, you and/or your client should consider its appropriateness to their objectives, financial situation and needs. You should also read the accompanying disclosure statements.