We have a two-pronged approach to delivering value-add. We combine our proprietary quantitative framework for determining appropriate market exposure with our discretionary research on individual equities. With a sizeable list of well-researched investment candidates and a disciplined and patient approach to allocating capital, the goal is to provide attractive, uncorrelated returns through all economic environments.
Step #1 - Determine desired level of market exposure. Getting the big picture right.
We have spent many years modeling the market at the macro level to gain an understanding of the key factors that influence equity returns over the medium and long-term. These factors have been reliable over multiple economic cycles over the past 50 years and are logical and intuitive. With this in mind, and given that the majority of your equity returns are a function of the direction of the overall market, there are certain times when it makes sense to have more or less exposure to the market. This macro framework guides our overall market exposure level at any point in time, which can vary from leveraged long to short.
Our proprietary framework for determining market exposure levels is based on economic, valuation and behavioral factors that we have identified as meaningful to future equity market returns. Our market exposure can range from -50% short up to 150% long. Historically, over 50 years, the model would have been leveraged long approximately 30% of the time and net short approximately 12% of the time.
Step #2 - Individual Stock selection
This entails a focused approach to the types of companies we select, preparation, and patience.
We seek enduring value opportunities in the small to mid-cap space, where solid research can uncover good opportunities. We emphasize "enduring", because company lifecycles are getting shorter which reduces the predictability of future cash flows; this is integral to the types of companies we select, as well as how they are valued.
Our preparation entails an ongoing and active research effort to maintain an inventory of 50-100 well-researched ideas of companies that we wish to own for the long-term and an inventory of 10-20 companies that we deem are significantly overvalued by the market. While the majority of candidates on our list will not currently be trading at a price that will entice us to buy or sell, with this preparation, we are in a position to take advantage when the market, from time to time, delivers these opportunities.
Exercising patience in waiting for these opportunities is arguably the single most important trait for investing success cited by the legendary minds in investing. Having a large inventory of investment candidates facilitates implementing this discipline.
We have two baskets; one is a basket of long ideas which we expect will outperform the market, and the other is a basket of short ideas which we expect will underperform the market. The weights of each basket are adjusted to reflect our desired level of market exposure from Step #1. The holding period for the long positions is generally very long term, while the short positions have a much shorter expected holding period and are utilized to accomplish our market exposure target.
Our value proposition in sum
We believe that the combination of our proprietary macro framework, a sizeable list of well-researched investment candidates, and a disciplined and patient approach to allocating your capital, will deliver superior returns and enduring value over the full cycle.
Proprietary quantitative market exposure model: Market exposure is adjusted based upon a rules-based process validated over fifty years covering multiple economic cycles. It is expected to deliver attractive, uncorrelated returns, particularly during down markets, when diversification most needed.
Reasonably concentrated portfolio: Having 10 to 15 positions in each of our long and short baskets allows detailed due diligence, and research effort required to properly assess and monitor each stock.
Risk management: The maximum individual position size in the long portfolio is 15% and in the short portfolio is 10%. The total of long plus short exposure will not exceed 250% of the account value.
Custodian: Available only on Interactive Brokers platform.