Core Philosophy

All of our investment strategies rest on a common philosophy that portfolio outperformance is generated by:

  • Transforming both proprietary and academic research into investment strategies that adapt to ever-changing capital markets
  • Creating an initial buy list through proprietary multi-factor models
  • Integrating sophisticated quantitative research with careful fundamental analysis.
Ultimately, we believe that disciplined investing drives portfolio alpha.


Process


More so than growth investors, we prefer to characterize our style as earnings-cycle investors. Our investment process is designed to identify companies displaying above-average and sustainable earnings momentum. Based on in-house and academic research, we believe that EPS estimate revisions and EPS surprises (relative to consensus estimates) are among the most unbiased “signaling devices” in equity markets.

Our process begins by identifying promising stocks within the investment universe through proprietary multi-factor econometric models. Our models have been developed to, in essence, quantify the fundamentals. Along with other key attributes, we search for firms with positive EPS estimate revisions, accelerating EPS momentum, and consistent EPS surprises. This first stage allows us to identify the best earnings growth stories in the relevant universe.

The next step of the process focuses on the fundamentals. Our sector leaders perform rigorous analysis of financial statements, with a primary focus on the balance sheet and cash flow statement. This careful analysis attempts to gauge whether the company possesses a reasonable debt/capitalization profile, an efficient working capital management strategy, improving cash-on-cash returns, and a rational cash flow utilization. We also stress test the strength of debt coverage ratios and analyze debt repayment schedules to avoid refinancing crunches and liquidity mismatches. Finally, we check for accounting integrity by cross-checking operating CF with reported EPS to ascertain whether accounting earnings are consistent with cash generation.

The last step of the process is portfolio construction.Our portfolios tend to be fairly sector neutral, with the over- or under-weighting of sectors driven by a set of proprietary multi-factor models that are similar to those used to select stocks for the initial buy list. Risk control is also a key element of portfolio construction. We closely monitor the key elements of our portfolios, such as tracking error, market cap distribution, and growth/value traits.

From start to finish, the overall process stresses discipline; however, we do not believe that disciplined investing means stagnant investing. Good investors stick to their knitting but also recognize that the markets do change. With the assistance of our academic advisory board, we are constantly evaluating the efficacy of our quantitative models, our fundamental analysis, and our portfolio construction techniques. Our clients can rest assured, though, that as our techniques and analysis may evolve as the markets change, any change in our process is done in a disciplined manner, with extensive back-testing, statistical analysis, and robustness checks.