Risk Management

Valuation Risk

"Pick stocks that offer above average growth rate and an attractive dividend yield”
Valuation risk can arise for strategic, operational and financial reasons, but all risks are certainly amplified if one buys businesses where a share price is inflated relative to the size of company’s current operations. In the long run, most risks can be mitigated through focusing on the risk of loss of value pertaining to each individual investment selection after taking into account the cost of entry and exit. Legae Investors manages this risk through its research process.

We have a number of in-house measures that identify potential downside of investment. Performance attribution analysis has illustrated that we obtain at least as much performance relative to our benchmarks from avoiding disaster stocks as we do from our winners.

Exposure Risk

This is the risk that one is over-exposed to a performing investment. As investors, we focus on buying companies that have strong growth rates. As a result, we do not set maximum or minimum weightings for different size bands of equities. There is a great deal of interchangeability between the bands and there are times when certain bands become over-exposed to certain sectors or industry groupings. We do however, have a number of rules regarding limiting exposure to individual companies or sectors.

Key Investment and Operational Controls

From a control risk perspective, we use segregation of duties, timorous recording, appropriate authorization and management supervision as the principal methods to mitigate risk. The Investment Managers place the orders which are automatically tested against client mandate restrictions, availability of script and /or cash. The order may only be authorized by the Investment Managers. Once authorized, the order is place with a stockbroker, telephonically or by fax, setting limits within which the stockbroker may deal. The Investment Manager enters the price and quantity of the transaction into the system and performs the allocation according to the original orders. The Operation Department administrators enter the detail, check brokerage and arrange settlement.

Key Investment Process Controls

  • Unauthorized trades: All orders placed by Investment Managers are allocated to an individual client portfolio with specific quantities and price levels. This order is then authorized against client’s mandate by the Portfolio Management System and reviewed by the Compliance Officer. Only once authorization has taken place may the dealer execute the trade.

  • Mandate violations: All orders placed by the Investment Manager are reviewed by the Investment Committee to ensure that the mandate is not being violated. This review takes place prior to the order being authorized and the executed by the dealer. If the order is not authorized then it may not be executed.

  • Excessive exposure bets: Excessive exposure bets are monitored on an ongoing base. Action is taken dependent on the impact of the bet on the total risk of the equity portfolio and therefore the diversification of the portfolio. If there is a contravention of limits it will be rectified immediately.

  • Credit risk exposure: We only place client’s liquidity in the top grade banks

  • Poor deal execution: The Investment Manager sets execution limits for the brokers, and internal and external deals are monitored on a daily basis.

  • Systems failure: Backups are made daily and are stored off site.

  • Fraud: We use external custodians and stockbrokers for execution. Our clients specify the accounts that withdrawals and income get paid into for electronic transfers. These accounts and signatories must match the one on the Master Application Form, which is kept in a locked security location. For non-electronic withdrawals, the signatures are different from the people who prepare the checks. A completed, Identity verified form must accompany redemptions. Redemptions over a certain amount are subject to cross verification

 

 

 

 

 

 

 

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