Management Process

Using a combination of quantitative tools and qualitative assessment, we identify undervalued companies with a competitive advantage. We attempt to mitigate our investment risk by purchasing stocks where, by our calculation, the potential gain is at least three times the potential loss (a Reward-to-Risk Ratio of 3:1 or greater). While our investments fall into three different categories - Leaders, Laggards and Innovators - all share the key characteristics of a sustainable competitive advantage:

  • Differentiated product or service offering
  • Capable and motivated leadership
  • Financial stability

Our experience, and performance record, has shown that the marriage of attractive valuation with these characteristics increases the odds of investment success.

STEP 1: Idea Generation
Most investment ideas are generated through an internally-developed quantitative model that identifies companies with attractive valuations and improving earnings expectations. Valuation metrics used are tailored to the industry in which the company resides and the highest scoring stocks are candidates for qualitative analysis.

 

OUR INVESTMENT PROCESS

Roll over diagram for further explanation
of our process

Idea Generation
Industry Research
Company Analysis
Portfolio Construction
Monitoring

 

STEP 2: Industry Research
Using a 13-factor Industry Matrix, we seek to identify a company’s investment category. Leaders have historically produced outsized returns, but are experiencing short-term difficulties; Laggards have failed to generate value over time as evidenced by poor historical performance and depressed margins and Innovators support product and service introduction through a significant commitment to research and development.

STEP 3: Company Analysis
Our next step is to determine whether a company possesses a strong core business that can provide a competitive advantage over the long term, while understanding the company’s near term business risk and the stock’s valuation risk.

Business Risk: Our fundamental analysis encompasses a rigorous review of corporate financials and filings, interviews with management and a study of key competitors. We focus intently on the quality of the company’s product or service offering, leadership and balance sheet and determine whether operating performance and profitability are likely to improve or weaken.

Valuation Risk: Valuation analysis is a key component of our process and we will invest only in companies that offer a Reward-to-Risk Ratio of greater than 3-to-1. Using the most relevant financial metric, and considering a company’s business and profit cycle, we arrive at a Reward-to-risk ratio for each potential investment.

STEP 4: Portfolio Construction
Our bottom-up research effort results in portfolios of 40 to 70 of our best investment ideas. To ensure diversification, we have set parameters for how much we can over or underweight sectors versus the product’s benchmark and a typical position size is 1.5% to 2%. How we are positioned at the sector and investment category level is a result of where we see opportunity at the stock level.

STEP 5: Portfolio Monitoring
We monitor our stocks closely to ensure that company and industry performance is consistent with our investment thesis. We will part company with a stock due to stretched valuation (we update each company’s Reward-to-Risk Ratio weekly), loss of confidence in management or to fund more attractive relative opportunities.