The following research paper was selected for presentation in the Due Diligence Forum program at PortfolioConstruction Conference 2008.

Category
Subcategory

Taking Stock (Australian Equities)
Small caps

Due Diligence Forum speaker

David Wanis
Portfolio Manager
Schroders

Due Diligence Forum summary

Assessing and managing portfolio risk in small caps has traditionally been done by applying recent historic share price volatility and correlation data to an index based model in order to provide a ‘best guess’ estimate of future risk. The premise behind this method is that the recent past is the best estimate of future events and as such, portfolio risk measurement has become defined by this ex-post approach.

This presentation and underlying research paper address an alternative approach using a combination of fundamental stock level research and quantitative methods to estimate ex-ante portfolio risk based on exposure to three primary characteristics: operating leverage; financial leverage; and, diversity of portfolio free cashflow to specific macro-economic influences.