Our investment methodology is based on our proprietary Four Pillars Process. The Four Pillars Process is an exclusionary investment approach that eliminates businesses we believe are less likely to contribute to client and portfolio goals.
Pillar 1: A quantitative screen that eliminates businesses which fail to meet our minimum requirements for profitability, trading liquidity, fiscal conservancy, shareholder-friendly actions, and growth. Our quantitative screens reduce our opportunity set from over 10,000 companies to under 400.
Pillar 2: A qualitative review of each company’s consistency, reputation, and business environment. We consider Porter’s forces to assess each company’s competitive position. We review each company’s historic revenue and margins and mathematically compare them to trend and to peers. We review reports on employee engagement, customer ratings, and “most admired” lists to understand businesses reputations. This gives us a mosaic viewpoint about each company’s competitive advantages, operating consistency, and organizational character.
Pillar 3: The Master List is a group of 100 to 150 businesses that have both the quantitative and qualitative characteristics we find compelling. Our Master List is regularly updated and reviewed and we develop our own opinion of valuation on each company. Our valuation methodology is a two-stage earnings and cash flow-centric discount model. Our valuation methodology is designed to compare each business that survives our quantitative and qualitative Pillars on an apples-to-apples basis.
Pillar 4: We believe portfolio construction is primarily an opportunity to mitigate portfolio risk. We manage risk by limiting exposure to individual securities, industry groups, and sectors. For example, by policy, we impose portfolio purchase limits on individual securities to 3% of total equities.
The goal of the Four Pillars Process is to create the highest probability that our results will be competitive, consistent, and compounding.
Our quantitative screens measure relative operational stability compared to peers and market.[B1] We look for businesses with appealing revenue stability and EBITDA margin stability as measured by the correlation coefficient of historical results regressed against the company’s trend. For example, all other factors held constant, we would prefer a business that has grown its revenue at a consistent rate to a business that grows quickly one year and slowly the next. Our preference is based on our belief that consistent growers [B2] are more appealing when the economy and markets are in doubt.
- We look for businesses whose revenue and earnings are expected to grow over the long run.
- We look for businesses with sufficient liquidity.
- We prefer businesses with modest levels of debt relative to their peers.
- We require our businesses to demonstrate that they are focused on shareholder returns by paying dividends and repurchasing shares.