We manage concentrated portfolios, embracing both growth and risk management by identifying companies with skilled management that have delivered consistent earnings and cash flow growth. “Consistent growth” are the watchwords here. To do this, we apply two theories from academia : the Low Volatility Anomaly and Correlation Analysis.
We believe implementation of the Low Volatility Anomaly theory through our proprietary Risk-Adjusted Growth model (RAG) is beneficial in two essential ways:
1. It facilitates identification of, and investing in, companies that have demonstrated consistent earnings growth year over year, and
2. limits portfolio risk – studies have shown that companies delivering consistent earnings are more likely to continue doing so and therefore present less risk of performing poorly in the future.
High correlation presents real risks to portfolios during downdrafts. Many steps taken by managers don’t adequately diversify portfolios due to excessive correlation among sectors, industries and companies. We undertake a comprehensive Correlation Analysis process that allows us to manage a small portfolio while still keeping it well diversified.
The objective of our process is to maximize our investors’ upside opportunity, while simultaneously seeking to reduce the risks that Growth portfolios often encounter.
Our process is designed to identify consistent growth companies in a crowded world of momentum-driven opportunities. To do this we engage in a process of discovery designed to identify those companies that have a demonstrated history of growing earnings and compounding shareholder value over time, which we then use to build what we consider to be a concentrated and diversified portfolio of thoroughly researched stocks.
Finding Consistent Growers – Our process is rooted in the Low Volatility Anomaly theory and is integral to our Risk-Adjusted Growth model. This model analyzes historical and projected returns over different time horizons and assesses the degree to which those returns vary from each other during that period. Those companies with meaningful variations, or volatility, are excluded, and the most consistent growth performers are selected for the next steps in the process.
Understanding Key Drivers – The next step involves more traditional in-depth fundamental analysis, during which we seek to assess the most important quantitative and qualitative aspects of an investment. We review data to understand a company’s key revenue and cost drivers, as well as the ways in which it uses its cash to compound shareholder value. Beyond quantitative measures, we also assess how capable management has been, if they treat shareholders like owners, how transparent they are, and whether they have a clear plan for future growth.
Minimizing Correlations – Our correlation work involves analysis of the multiple ways in which correlations can negatively impact a portfolio. We measure the correlation of each stock in the portfolio to every other stock in the portfolio to try and minimize the extent to which we are doubling up on exposures to certain variables. We also evaluate each stock’s correlation against the portfolio in aggregate to assess whether it is adding to certain risks or reducing them. This process is also applied to stocks we are evaluating for potential inclusion in the portfolio, so that we can maximize diversification across our concentrated portfolio. We believe this process provides our investors with an opportunity to capture the best aspects of growth stocks without incorporating some of the riskiest aspects.