DWS’s approach for comparable fundamental stock selection
CROCI is DWS’ proprietary valuation approach for global equities. Since 1996, CROCI has been analysing companies in a harmonised and consistent fashion to allow the meaningful comparison of valuations and other metrics across sectors and country borders.
The most attractive companies, measured in fundamental economic valuation terms, cannot easily be identified based on pro-forma annual financial statement data. Accounting standards allow companies significant leeway in their treatment of assets and liabilities, making it difficult to compare the true economic situation of companies.
The aim of the CROCI approach is to identify relevant data that is readily comparable between companies in order to provide a solid basis for fundamental equity investment.
CROCI uses proprietary and unique company analysis created and maintained by a team of over 50 investment professionals. The team performs due diligence on over 900 companies in a consistent and comparable fashion.
How do we obtain economically comparable data?
The value-oriented CROCI approach values companies according to a uniform method, making it easy to compare the value of shares in different companies.
CROCI stands for Cash Return On Capital Invested and is the “economic” equivalent to return on capital employed. CROCI is the central metric of the DWS approach.
Company balance sheets are exhaustively analysed by CROCI company analysts according to a standardised methodology. It is a labour-intensive process; entering a new company can take a month or more of man-hours and each company is typically updated at least six times a year. Up to 250 line items per analyzed company each year are required to make company data readily comparable with other companies, including those from other sectors and countries, and to determine the various key metrics (such as CROCI). Together with our definitions of the enterprise value and the capital employed, this forms the Economic PE ratio, CROCI’s key valuation metric.
What distinguishes CROCI from other ratios?
Unlike many conventional valuation methods, the CROCI approach seeks out any asset that generates cash flow, regardless of whether it is used in the pro-forma accounts. Only by truly understanding a company’s balance sheet can its business model be rendered comparable.
Why CROCI?
CROCI has historically been able to generate alpha over the cycle in the order of 3-4% per annum over nearly 20 years of track record* (*past performance is not indicator for future performance)
CROCI can provide investors with core exposure to developed markets and sub-regions, or provide a satellite approach such as with its unique sector-rotation approach
CROCI gives consistent exposure to economic value, which has historically provided solid downside capture in normal markets with extra upside capture in distressed markets.
CROCI strategies tends to have superior sharp ratios than conventional value strategies, as the company level due diligence helps to keep the volatility of strategies generally in line with the broader market.
CROCI portfolios tend to give exposure to a better quality of company in aggregate, so are well suited for holding over the investment cycle.
The CROCI strategy: how are DWS clients' funds invested?
Funds are invested in the most favorable stocks according to the CROCI method. In addition to the provisions of Article 8 of the EU Taxonomy Regulation, other ancillary conditions are taken into account, e.g. for good diversification or sufficient liquidity of the stocks to be traded. As a rule, the securities in the portfolio are equally weighted. The allocation is reviewed on a quarterly basis and adjusted if necessary. At the same time, the securities in the fund are rebalanced.
The value-oriented and fundamental CROCI approach was developed in 1996 for company analysis.
More than 50 analysts consistently evaluate over 870 important companies from various countries and regions using this approach. The DWS approach differs significantly from classic value strategies. Of particular importance in this context is that CROCI funds invest in significantly higher-quality stocks.