Investment process - Valuation is key

There are many attractive companies in the stock market but at any point in time most have valuations that already reflect their potential. This is relevant to Cartesian’s long and short portfolios. For them, the valuation must offer significant material up or downside.

The valuation approach employed by Cartesian treats investment as part-ownership of an individual business. The team therefore values the entire enterprise, adjusting for debt and off balance sheet commitments, such as pensions, as well as assets that are less apparent or ‘hidden’. The value of a company’s equity is calculated as the residual value after the other assets and liabilities have been taken into account.

A wide range of valuation measures are used as part of the process. The Cartesian fund managers are conscious that simple earnings multiples can be distorted by the effects of capital structure and tax strategy, and may not truly reflect underlying operating performance. For this reason they also use operating profit, cashflow multiples and asset-based valuations.

This approach is more aligned with the mindset of a company’s finance director or a trade investor. It leads Cartesian to naturally favour areas of the market in which bid activity frequently takes place, although there is no attempt to second guess the next individual takeover candidate.