We are fundamental, bottom-up investors who rely on our in-house research to make investment decisions. We assess quantitative and qualitative factors to estimate the intrinsic value of a company. Having a reasonable understanding of a company’s assets, liabilities, free cash flow, capital needs, return on capital capabilities and competitive position are important factors in assessing long-term value creation.
Surveying the Landscape
Our team of generalists seek to ferret out compelling investment ideas from the bottom-up, irrespective of economic sector, industry or market cap. Ideas can come from numerous sources, such as screening a database for certain price-to metrics, periodicals, trade publications and a knowledge base of companies going back more than 35 years. We are attracted to companies priced below their historic price-to multiples and the market.
If an idea survives a cursory pass, we typically begin reviewing its various SEC filings, assembling data and assessing its quantitative attributes. Ideally, candidates will have growing revenues, increasing profit margins, an adequate return on capital and appropriately structured balance sheet. Qualitatively, we consider a company’s industry and competitive position, risk of product or service obsolescence, insider ownership, quality of management, compensation structure and corporate culture. We prefer to invest in businesses with management compensation plans aligned with the creation of shareholder value and meaningful insider ownership. Judgements regarding the quality of the business are made to complete the valuation process. Companies meeting our quantitative and qualitative criteria may be considered for investment.
Given our strict criteria and relentless pursuit of value, only a fraction of the companies we evaluate make it to this stage of the process. For the ones that do, the lead analyst will make a case to other members of the Research Group and field questions. After questions have been satisfactorily answered, a decision is made to purchase, inventory or reject the idea. If fully invested when a new investment is approved, a separate decision must be made regarding what to sell.
We typically hold 25-40 businesses or stocks diversified across several sectors in a portfolio. Sector and industry guidelines are independent of the benchmark. We may be void or overweight certain sectors. This often results in our portfolios behaving differently than the benchmarks. Individual stock positions are generally limited to five percent of the portfolio at initial purchase and are held for three to five years on average. A sell decision can be driven by a number of factors: a security becoming overpriced relative to our estimate of intrinsic value, the position becoming too large in relation to the portfolio, a more compelling opportunity, or a deterioration in fundamentals.
Styles of Management
The level of risk ascribed to each strategy is generally defined by the ratio of equity to fixed-income. A strategy with more equity exposure is typically viewed as riskier than one with less equity exposure. However, this is an imperfect assumption because there are various kinds of risk. For example, less equity exposure may reduce the risk of loss due to a decline in equity prices, yet increases the risk of inflation eroding your purchasing power over time. Of course, no investment strategy is free from risk.
The ratio of equity to fixed-income within a client’s portfolio and our strategies is a function of a client’s propensity for risk and the Research Group’s assessment of market conditions.
Public Investment Strategies