Our Investment Philosophy & Process

Elston believes the most effective way to achieve true diversification from traditional markets is through exposure to intelligently and actively managed portfolios.

Elston’s use of managed account structures is central to this philosophy and over the past 10 years, Elston has grown to become one of Australia’s largest providers of managed account solutions, focussing on capital preservation and portfolio returns over the long term.

A managed account (‘managed account”) is an investment structure in which the underlying assets are owned by the investor and authorise an investment manager (‘Elston’) to manage the assets within certain guidelines.

The managed account structure provides legal ownership, control, 100% transparency, portability, tax efficiency and customisation, which significantly improve the investment process.

The tenets of our investment philosophy are:

Protection of Capital Helping you minimise risk for your clients

At Elston, we’re focused on protecting investor capital. That’s why we avoid speculative grade securities, to substantially decrease the risk of a permanent loss of investor capital.

Long Term Returns We’re invested in your clients’ future

Elston’s investment decisions reflect our commitment to driving performance, to achieve long term returns. While we’re conscious of the influence momentum has on execution, we believe a focus on fundamentals, rather than short term technical factors, delivers consistent outcomes for investors.

Value and Growth Prospects Identifying the best opportunities

At Elston, we identify the value and growth prospects of companies, industries and economies, and then overlay both relative and absolute valuation methodologies, to avoid overpaying for this growth.

Genuine Portfolio Diversity Reducing risk through diversity

At Elston, we promote genuine diversity in investment portfolios for professional advice firms. We use traditional strategic asset allocation and MPT portfolio construction. However, we always strive to reduce potential concentration risks and systemic correlations that may exist in some market indexes, or between securities within asset classes.

Investment Discipline Delivering consistency and certainty

Our focus on investment discipline is designed to create and refine an effective investment policy framework, so we can deliver consistency and certainty for investors. Elston effectively uses a multi-stage investment process to provide efficiency for professional advice firms.

Low Tolerance for Illiquid Investments Maintaining access to capital

With a focus on investing in direct securities, with defined parameters for access to capital, Elston looks to avoid situations where investors lose their access to capital for extended periods of time (for example, frozen funds). This also means investors’ funds are highly portable, should their situation or needs change.

After Tax Management Maximising after-tax outcomes

Elston’s Managed Account service allows us to identify an individual investor’s tax status and assets, which can be incorporated into their investment management, with a view to maximising after-tax return outcomes. As an adviser, you can utilise this resource to ensure your clients get the most from your strategic advice.

Proactive Communication Keeping your clients well-informed

At Elston, our analysts understand the importance of communicating portfolio information to clients quickly, so when changes are made or market events occur, you know what changes have occurred and why ‘on the day’. This makes it easy to keep your clients informed.

Our Investment Process

Following on from our investment philosophy, Elston has devised a robust and repeatable process for portfolio construction and security selection, designed to provide the best outcome for the investor.

Asset 1

Step 1 - Quantitative Screening & Ranking:

To begin the process of portfolio construction, all companies in the investable universe are ranked using a combination of growth and value factors. The ranking process results in frequent assessment of all companies, based on a set of objective factors, which, in our view, are important when it comes to driving the long-term success of a business.

Step 2 - Valuation & Expected Return:

The second step involves looking at a combination of expected capital growth and dividend yield, with the focus on after-tax total returns. Using historical and consensus forecast data, combined with our proprietary valuation process, a fair market price and expected total return of all companies in the investable universe is estimated.

The first two steps rely primarily on the financial data. This approach allows Elston to analyse the universe systematically in a consistent and repeatable manner, which eliminates unnecessary time spent analysing any one company, unless the desired criteria is met.

Step 3 - Qualitative Assessment:

This stage is focused on gaining an understanding of the complexity of operations, market share, earnings stability, balance sheet capacity, margins and management quality of a company. It also involves understanding the impact of the current business cycle and potential structural changes on a company’s future growth prospects.

Important tools when assessing the above, are calls and meetings with company management, as well as investor conference calls and presentations, annual and interim financial reports and third party research.

With a core philosophy of avoiding the permanent loss of capital, any company that appears unable to service its debt obligations will be eliminated from consideration.

Step 4 – Portfolio Construction:

After the securities have been selected for investment, the model is constructed in accordance with strict policy guidelines to ensure true diversification is achieved, across both securities and sectors.

A fixed weight methodology is used, as we feel this is the best way to avoid concentration risks and crowded trades, while still enabling the potential for outperformance of the benchmarks, despite a conservative investable universe.

Model weightings for each security are not based only on the potential total returns from that security going forward, but also the associated risk and how its inclusion impacts the overall exposure of the portfolio.

The investment rationale and model weighting for each security is constantly reassessed.  While this will not result in constant turnover, it ensures that changes are made promptly either to remove poor performers or to take advantage of opportunities as they arise.

Timely communication of investment decisions is sent to both advisers and clients, keeping them fully informed of all changes to their professionally managed portfolio.

Step 5 - Momentum screening & Portfolio Execution:

Once a decision has been made to buy or sell a company, the managers consider various momentum indicators before the decision is actually implemented. These include how the stock has performed relative to the market, its current price relative to its historical moving averages, short interest and any changes in earnings estimates which may be driving the price higher or lower.

This step helps identify possible discrepancies between our view of our long-term fundamental value and the short-term market price, but will not change the buy or sell decision. It merely informs the timing of the execution.

All client trades are executed directly on the ASX, utilising bulk transactions and the latest algorithmic trading systems to process orders efficiently. Investors receive the best possible price, whether buying or selling, without errors and with minimal transaction costs.

As each investor has their own individual HIN, trades are settled to their account on time, every time.

Step 6 – Ongoing rebalancing:

Client portfolios are regularly compared to the model portfolio to ensure that individual positions and asset class exposures do not drift outside the set guidelines. If they do, smart rebalancing is undertaken immediately.

Sophisticated after-tax management and individual parcel tracking, combined with the ability to identify an investor’s individual tax status means rebalancing and other investment decisions can maximise after-tax returns and deliver “tax alpha”.

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