Process
Our investment process searches for opportunities in the stock market wherever they may be, regardless of investment style or economic sector. A two-step quantitative security selection model evaluates stocks based on style-specific and sector-specific criteria and narrows the investable universe. The investment team then works collectively to identify and prioritize the investable universe, research companies, compile investment thesis's for each company of interest, and assemble alpha-generating portfolios of companies we believe have the potential to unlock value over a 12- to 18-month time horizon.
1 Stock Universe
Screen relevant FactSet universe for companies based on:
- Financial strength
- Third party coverage
- Appropriate market capitalization
2 Screening
Value
(a) Quantitative Screening of Value Qualifiers
- Lower P/E
- Lower P/B
- Higher Dividend Yield
(b) Quantitative Screening of Value Model
- Valuation vs. Sector
- Effective Capital Usage
- Earnings Revisions
- Long Term Growth vs. Sector
(c) ACCEPT Top 40% of Each Sector
Growth
(a) Quantitative Screening of Growth Qualifiers
- Higher Sales Growth
- Higher Reinvestment Rate
- Higher Long Term Growth Rate
(b) Quantitative Screening of Growth Model
- Valuation vs. Sector
- Effective Capital Usage
- Earnings Strength, Stability
- Reinvestment
(c) ACCEPT Top 40% of Each Sector
3 Fundamental Research
Positive Risk/Reward Profile
Improving Fundamentals & Market Outlook
Financial Strength & Flexibility
4 Portfolio Construction & Monitoring
Build portfolio of 65 to 85 stocks in large cap portfolios and 80 to 120 stocks in mid cap portfolios. Monitor holdings on an on-going basis.
Our initial universe is the FactSet database, which is comprised of over 6,000 stocks. From here, we screen the universe based on market capitalization, financial quality and liquidity measures.
Using our proprietary growth and value models to analyze these names more deeply, we narrow the field. It is from this narrowed universe that the team may select securities for in-depth fundamental analysis and further consideration for addition to the portfolio.
The first phase of fundamental research is performed by sector specific research analysts. The goal is to isolate the stocks of undervalued companies with improving fundamentals. The analyst is tasked with developing an investment thesis spanning an initial 12-18 month time horizon, identifying potential catalysts that may allow a stock to appreciate and identifying risks that may undermine this projection. A detailed report containing projections and risks for each stock, referred to as a "First Pass", is submitted to the rest of the team for further consideration.
The second phase brings the portfolio managers into the fundamental research process. The portfolio managers carefully assess the research analysts' reports and conduct their own independent research on the same stocks. This fosters an interactive team approach and encourages debate about the analysts' investment thesis. These stock specific discussions are held formally on a weekly basis and informally in real time via email or face-to-face conversation. This collaborative stage is the primary source of value added in the process because it blends critical thinking and careful analysis with the portfolio manager's wealth of experience.
Once a stock is added to the portfolio, the appropriate research analyst is expected to continually handicap the range of possible outcomes for a stock. As ongoing news and data become available, the analyst updates the group and the team engages in a discussion of the analyst's conclusion and recommendation much as they did before adding the stock to the portfolio.
At any given time, the team can have from 10-15 ideas in process in the fundamental analysis stage.
Approximately 80% of all research is performed in-house while the remaining 20% is sourced from various third party research vendors.
Once its front-end screens narrow the universe, the team may select securities for in-depth fundamental analysis and further consideration for addition to the portfolio. The team has five sector specific analysts, who are focused on fundamental research.
The goal is to isolate the stocks of undervalued companies with improving fundamentals. The analyst is tasked with developing an investment thesis using an initial 12-18 month period and identifying the potential catalysts that may realize value in the stock, and risks that may undermine this projection. A detailed report, referred to as a First Pass, containing projections and risks for each stock is submitted to the rest of the team for further consideration.
The research staff meets with the portfolio management team to discuss the merits of a particular stock for investment attraction. This meeting occurs at least once a week and more frequently when warranted. A majority of the managers must be in favor and endorse adding the stock to our clients' portfolios. Once a stock is added to our portfolios, the team monitors all portfolios for compliance.
The team utilizes portfolio construction as a risk control measure. In the Large Cap portfolio, for example, the relative weighting of sectors in the portfolio are controlled through the following guidelines in selecting and weighting portfolio stocks:
For sectors representing more than 5% of the index, corresponding sectors will be:
- No greater than two times the index weight
- No less than one-half of the index weight
- Maximum Sector weight is 35%
Portfolios are generally managed within these guidelines:
- Number of holdings ranges from 65-85 stocks
- Turnover ranges between 35-50%
- Stock Position Limits of 0-5%; positions reaching 3.5% are candidates to be trimmed
- Market Cap Controls: Stocks must have a minimum $3 billion market cap
- Target portfolio weighed average market cap is $60-90 billion, with no maximum
- Cash Positions targeted to be minimal, ranging from 0-3% — typically hold 1% or less
The team maintains a dynamic buy/sell process and constantly re-evaluates each holding for consistency with the original investment thesis based on fundamental developments, valuation, momentum and other factors. Once an investment thesis is approved, an initial target price range is established.
Catalysts for sale include:
- Maturation of the investment thesis
- A material change in the original investment thesis prior to maturation.
- The emergence of a more attractive candidate.