Investment Philosophy & Process

Equity philosophy
The cornerstone of Umthombo Wealth’s investment philosophy is rooted in long-term valuation driven investments that drive superior returns for our clients over time. We seek to invest in businesses that possess robust balance sheets, strong cash flow generation, unrelenting governance approaches and a superior earnings profile. We believe companies who are able to demonstrate this on a consistent basis have the potential to deliver sustainable alpha uplift and long-term capital appreciation for our clients. We are Style Agnostic. Our philosophy allows for an unconstrained investment approach that is ideal for the relatively small South African investment universe. Our approach yields more suitable investment options to construct a prudent, risk-conscious portfolio that differentiates us from competitors. We therefore favour a multi-faceted style agnostic investment technique which allows us to consider every potential investment on its own merit, irrespective of market definition. Subsequently, we can accomplish a higher probability of consistent performance across different market cycles.
equity investment process
Our investment process blends traditional investment techniques with innovative data and research-driven quantitative and qualitative methods. The techniques utilised include: inter-alia, qualitative and quantitative idea generation, conventional and unconventional valuation methodologies, proprietary ESG evaluation frameworks, and calculations of expected returns’ distribution via detailed scenario analysis. We incorporate behavioural finance philosophy in our process. Umthombo’s active listed equity investment process is based on 5 Steps; as can be observed on the diagram below illustrating Umthombo’s Investment Process, followed by a description of the comprehensive and dynamic investment process.

Since we consider every possible investment, we have a comprehensive process that aims to reduce the universe through both qualitative and quantitative techniques. Our process encompasses idea generation from each analyst’s share universe (top buys and sells), high level valuation ranking table, quantitative screening tool, relative graphs and price movements, bottom fishing (contrarian measure with quality overlay), stock and macro screens, and broker research.

Once an investment opportunity is identified, an analyst is tasked to do a high-level analysis to assess whether the stock warrants further scrutiny. High level analysis could be qualitative, quantitative or a combination depending on the requirements. High level valuations are done on analyst’s or consensus forecasts.

Once it is decided that the idea has merit, the analyst is tasked to produce detailed work and to build a fundamental investment case in accordance with our investment philosophy. The detailed analysis incorporates the creation of a qualitative investment case. The qualitative investment case will then be quantitatively modelled (financial statements, notes, and segmental analysis) and supported by detailed scenario and sensitivity analysis on forecast variables or valuation assumptions. The drivers and risks of each investment case will be clearly explained, with additional emphasis on ESG and earnings quality. The primary output is the distribution of expected risk and returns, as well as the sustainability of the investment case.

Our portfolio construction process is a function of product offering (aggressive, moderate, conservative and unconstrained) in which alpha transport and portfolio overlay techniques will be applied relative to specific benchmarks and within mandate specific parameters. This depends on the benchmark, mandate objectives and constraints. The process is scalable across the risk spectrum. We take into account the target tracking error as well the active share related to the mandate objectives.


We also apply common sense and qualitative analysis to reduce turnover and verify that the decisions are appropriate to arrive at the optimal portfolio. The team interrogates the optimal portfolio before finally generating orders into the market.

Risk management is of utmost importance and is done on a day to day basis. On a regular basis – at least monthly – we perform performance attribution analysis from both on risk and return perspective. Based on our continued risk management process and regular attribution assessment it will feedback into our investment process in order to potentially capitalise on any opportunities or to mitigate identified risks.

Fixed income philosophy
Umthombo’s Fixed Income Investment Philosophy is premised on a flexible long-term fundamental investment approach. At our core we are long fundamental investors. Our aim is to source and balance returns and alpha through various fixed income analytical opportunities. In this way, Umthombo’s Fixed Income offering will have the potential to deliver consistent risk-adjusted-returns and outperformance (alphas) over long-term market cycles spanning across three, five or more years and term periods. We constantly monitor and assess the macroeconomic landscape in terms of risk. When the paradigm shifts, we calibrate our position.


Fixed Income Investment Approach
Our investment approach leverages risk-adjusted returns and outperformance of three key investment principles: Risk Consideration, Investment Diversification and Consistent Generation of Accretive Alpha (Outperformance).
Defined key returns or alphas will come from the following four aspects:
• Relative Modified Duration Positioning
• Relative Yield Curve Positioning
• Credit Exposure
• Securities/Instruments Selections & Relative Value Trading
Fixed income investment process
Our investment process focuses on targeting various sources of alpha. This forms the basis from which we form our fundamental top-down, qualitative, bottom-up and quantitative research. Our fundamental research process is concentrated on analysing sectors from expected issuance, potential macro-economic drivers, and other “technical” challenges. We manage liquidity and exposure away from sectors with prevailing challenges into those more favourably suited to the forecast environment. We avoid credit where ESG issues have been raised by our team’s internal ESG reviews.
The Fixed Income investment process is based on 6 Steps:
To achieve consistent alpha, we believe in:
• Aggregating the PMs’ skills to analyse and exploit a wide-ranging opportunity set to ensure a diversified portfolio.
• Allocating risk accordingly based on our team’s convictions across these different alpha opportunities. This is crucial in achieving our goal of consistency of outperformance (mandated benchmark) over different market cycles.
• Allocating risk accordingly based on our team’s convictions and the degree of their convictions.
• Ultimately, we seek to create an optimised portfolio that seeks to maximise expected active return- while minimising volatility. The optimised portfolio demonstrates an efficient allocation of risk, cognisant of mandate limits across the global opportunity sets. We believe this approach is repeatable and gives us the best chance to achieve our goal of superior risk-adjusted returns over different market cycles. Our main objective is to maximise the Information ratio.
Ultimately, we seek to maximize the Information Ratio through maximizing alpha and minimizing volatility. We achieve this through achieving a low tracking error. We create an optimized portfolio using a technique which is repeatable and gives us the best chance to achieve our goal of superior risk-adjusted returns over different market cycles. The optimised portfolio demonstrates an efficient allocation of risk, cognisant of mandate limits across the global opportunity set.