Fundamental Investment Research

Jarislowsky Fraser Limited is a large investment counsel firm in Canada that focuses on investing for pension funds, pooled funds etc. In fact one of my funds within my pension account is with Jarislowsky Fraser. They have done ok for me so far.

You may be thinking that I thought The Dividend Guy didn’t do mutual funds. You are right, I try not to. However, my company pension account only has certain pension funds as an option so I really have no choice.

That being said, I was doing some research on the funds and the company that runs the fund and I liked what I saw. Their approach to investing is in line with mine – looking for quality undervalued stocks through fundamental analysis. I believe in looking at some of the stocks they hold, that they also like dividend paying investments.

What I really liked was their simple, down to earth description of how they analyze stocks. They state that their research is based on the following four characteristics:

1. Sustainable growth in earnings: we focus on identifying companies with sustainable competitive advantage in their industry. This advantage enables them to grow earnings and cash flow on a sustainable and predictable basis.

2. Strong management: we believe that companies with excellent management and a track record of working for the benefit of all shareholders hold the potential for outstanding performance. We assess the quality of management through on site interviews before the stock is added to or removed from the model portfolio.

3. Strong cash flow: we focus on a firm’s “economic earnings” or the cash earnings after capital expenditures. The firm got its start calculating cash flows for companies in the 1950′s and we continue to believe that companies with strong cash flow are those that are best placed to be strong performers.

4. Sound balance sheet: we will not buy companies with high levels of debt. We search for companies with strong balance sheets.

Of course, all of this is easier said than done. However, to me this is all investment research boils down to. There is a real tendency to over complicate things during investment research, but if you boil your analysis down to these 4 chunks then it becomes manageable and easier to ultimately make a decision.