Portfolio Managers
and Analysts
Idea
Generation
Conviction
through Analysis
Buy and Sell
Decisions
Portfolio
Construction
Portfolio Managers and Analysts
Goal: Gather as much information as possible and be able to see risk premiums rotate
- Analysts are information gatherers for the portfolio managers
- Analysts are generalists with emphasis on certain sectors
- Analysts do not issue price targets or recommendations
- Constant communication between the portfolio managers and the analysts is a key ingredient to the process
Idea Generation
Goal: Identify companies where market perception may be different from reality
Idea Sources
- Conversations with company management teams
- Discovery while doing research on other companies within the coverage universe
- Canvassing the professional relationships of the investment team
- Travel, company visits, and conferences
- Engagement with colleagues and resources on the sell-side
- Sourcing ideas is a responsibility of both the portfolio managers and analysts
Common Characteristics of Portfolio Companies
- Poised to benefit from recent industry consolidation
- Exhibit pricing power
- Strong brand awareness
- Undervalued earnings prospects
- High barriers to entry
Conviction through Analysis
Goal: Identify a company with unrecognized growth prospects and/or misunderstood value
- Develop an understanding of key investment merits by visiting with management, customers, vendors, competitors, and various industry sources
- Each company is evaluated independently
- Value a company’s segments on a standalone basis and compare to peer valuations
- Value and predict current and future cash flow using discounted cash flow analysis and modeling
- Appraisals of land, comparisons of like real estate, or value of operating assets in the event of a fire sale
- Develop a thesis on the cost to recreate the business
- Account for future earnings power
- Understand the market’s perception through study of sell-side research and the “short” argument
- Identify a catalyst that will likely unlock hidden or intrinsic value
- Gross margin expansion
- Expansion of points of sale distribution
- Acquisition synergies
- Develop a theoretical upside and downside and weigh risk/reward
Buy and Sell Decisions
Goal: Avoid group think, make timely decisions, and constantly own companies with attractive upside potential
- Constant evaluation of the upside potential relative to downside risk
- Weightings based on level of conviction, beta, potential mitigating volatility, and catalyst events
- Sell when the risk/reward proposition is no longer attractive
- May opportunistically reduce position size when the stock price makes a quick run
- Use cash opportunistically and add to names in which we have a continued conviction
- Manager Autonomy
- Each manager has autonomy to buy or sell at any time
- Manager is encouraged to act when they feel a conviction to buy or sell
Portfolio Construction
Goal: Take advantage of periods of inefficiency within a sector or the asset class
- Concentrate the number of holdings in the portfolio during a market pull back
- Concentrate the number of holdings in the portfolio within a certain sector during a sector pull back
- Attempt to spread out risk during frothier markets by adding to the number of holdings
- Entirely focused on security selection, indifferent to benchmark sector allocations
- Will largely stay close to fully invested and unlikely to make market calls by raising cash
Cash Flow - net amount of cash and cash-equivalents moving into and out of a business over a given period of time.
Beta -