Classic Large Cap Value
At a Glance
- Primary Benchmark: Russell 1000® Value Index
- Secondary Benchmark: Wilshire US Large Cap Value Index
- Universe: The Classic Large Cap Value universe is comprised of U.S. companies with market capitalization in excess of $1 billion that we believe are substantially undervalued on a price-to-earnings (P/E), price-to-book (P/B), price-to-free cashflow (P/FCF), or other valuation basis
- Portfolio: A conviction weighted portfolio designed to be well-diversified and carefully structured with regard to economic sensitivity. Greater than 50% of companies will have a market capitalization in excess of $5 billion
The Classic Large Cap Value risk-adjusted return objective is to outperform the Wilshire U.S. Large Cap Value Index, or client determined equivalent index, over a full market cycle (typically five years) by maintaining a portfolio consistent with large cap value characteristics. The strategy’s objective has been consistent since inception.
Investment Process Summary
The investment process begins with idea generation. We attend conferences and develop ideas internally via team discussions. We also create quantitative screens in an effort to find stocks with a market capitalization greater than $1 billion that are cheap on a price-to-earnings, price-to-book value, price-to-cash flow, or other current valuation basis relative to peers, their own history, and the market. We may also run other screens such as free cash flow and leveraged buyout screens to generate additional ideas.
Through fundamental analysis, we seek to understand the reasons a stock is cheap or out of favor and to identify those companies that are truly undervalued and most likely to return to normal valuation levels and profitability. Within the universe of undervalued securities, we seek to identify the best combination of valuation characteristics, earnings growth, and quality. Conclusions are based on a company's financial condition, competitive position in its industry, and quality of management. We pay close attention to the cash flow statement in order to evaluate the strength and security of the dividend. In addition, we focus on long-term macroeconomic conditions and industry trends in order to identify and measure the risks associated with a company's business. These factors lead us to identify those companies that have the best potential and necessary catalysts for a return to normal levels of profitability and valuation.
A portfolio manager is almost always involved as one of the individuals working on our multi-person process for each business we are examining. This means as we go through the process there is not an end state where a portfolio manager is being “pitched” an idea that is new; instead, it is a collegial process where at least one (if not more) portfolio manager is familiar with the financial statements and other source documents.
The positioning of an individual stock as well as other weighting decisions is driven by the valuation opportunity risks and benefits of the ranges of possible company-specific and economic scenarios competitive positioning of a company balance sheet quality and diversification considerations. You should be able to look at our portfolio by weighting to determine our conviction level and the risk/reward outlook at the current price.
We follow a disciplined approach and securities are sold for three main reasons. (1) The security approaches our estimate of normalized valuation and no longer offers compelling upside potential. (2) The fundamentals have deteriorated relative to our initial thesis such that we believe the prospects for re-valuation are impaired and are no longer likely to materialize within a reasonable time frame. (3) A more compelling opportunity arises.