Strategy

We believe having a strategy based on analyzing and interpreting specific fundamental data makes it easier to remove emotional biases from the investing process. The Fund's strategy is based on analyzing proprietary behavioral signals to identify confidence in a company from different areas of the market. By utilizing signals from distinct areas of the market, the strategy seeks independent validation of each signal with respect to a specific security.

Management Confidence

We believe the strongest signal a company's management can send to the market is paying a dividend.

This shows that management is confident that it can continue to generate cash flow into the future.
Due to the large negative implications for the price of a stock if a dividend is cut, management needs to be certain it can sustain or even grow future
dividend payments.

 

Analyst Confidence

Sell-side analysts have valuable insight into the future of companies.

This is expressed by screening for companies that analysts believe will have attractive valuations relative to earnings potential.

 

Creditor Confidence

Credit on a balance sheet is often misinterpreted by the market.

Creditors spend a large amount of time analyzing a company, both before and after the debt is issued.
Creditors would not provide financing if they did not believe in the strength and stability of the company.
Creditors continuously evaluate the company's financial strength as part of the debt covenants and look for companies with the financial strength and
cash flow to service debt payments.

We believe these signals are often overlooked or misinterpreted by the broad market, which can lead to inefficiencies and price distortions. By filtering out the "white noise" and focusing on specific signals from the market, the strategy seeks to identify securities which we believe have attractive valuations and offer the potential for above-average price appreciation.

The strategy focuses in on select fundamental data and behavioral signals that have shown to be indicative of the confidence sought when selecting securities

 

strategy clover

 

Stocks must meet the threshold for all of these criteria in order to be included in the portfolio

In order for an investment strategy to work we believe it must be implemented:

 

Consistently throughout all market conditions:

This allows the strategy to operate outside of irrational decision-making.

 

Opportunistically throughout the largest possible universe of potential investments:

This allows for consideration of the largest set of opportunities and investment in the best ideas generated by the strategy without external constraints.

 

Possible Benefits of Consistency and Opportunity

Being able to apply the same strategy throughout the investment universe can be a key driver of performance:

Allows for the best ideas to be included in the portfolio.
Allows for avoidance of potentially inferior stock picks made to stay within portfolio constraints.

We believe taking high-conviction positions in our best ideas provides increased potential for excess returns when compared to a more diluted portfolio.

Research shows that a relatively small number of stocks (20-25) provide the majority of a portfolio's diversification.

We believe adding more stocks to a portfolio dilutes the best ideas and reduces potential for outperformance.

 

Diminishing Marginal Utility of Adding Stocks to a Portfolio

conviction chart

Number of Stocks Held

 

Assumes stock standard deviation of 45% and inter-stock correlation of 0.33. Based on Evans, J.L., and S.H. Archer (1968), Diversification and the reduction of dispersion: an empirical analysis, Journal of Finance, 23, 761-767.

Idea Generation

The team starts with a universe consisting of 5,000 stocks (all U.S. exchange-listed common stocks, MLPs, REITs, and ADRs).
The universe is analyzed to identify stocks that meet all of the strategy's investment criteria:

Revenues
Indicators of:
        Management
        Creditors
        Analyst Confidence

 

Portfolio Construction

20-25 securities are selected from the pool of stocks that meet the strategy's investment criteria.
Each position is equal weighted to remove any biases.
Sector diversification is sought (6 or more GICs sectors).
Stocks must meet a liquidity threshold to be included.

 

Portfolio Monitoring

Portfolio is monitored daily for single stock events.

 

Sell Discipline

Stocks are sold immediately if:

A loss of confidence is shown by management or sell-side analysts no longer view the stock as having an attractive valuation.
A stock fails to meet more than one of the other investment criteria.

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