Philosophy / Valuation Driven® Investment Process
Our Valuation Driven® investment process is unlike that of any other asset manager. We built and maintain a proprietary research database of over 20 million out of sample valuations, unavailable to any other investment managers, based on our Economic Margin® Framework.
Because our framework and research process is proprietary, we believe this provides us a sustainable and repeatable edge in providing our investors superior long-term wealth creation.
Ultimately, our edge is the Valuation Driven® culture we created that permeates all our research and portfolio construction processes. Our Valuation Driven® process differs greatly from managers relying on less rigorous approaches, or commonly available data such as price multiples, price momentum, and other commodity financial data.
Our process combines proprietary quantitative insights and qualitative analysis to varying degrees based on each strategy. Although we manage several strategies with different objectives and investable universes, they all adhere to the following principles:
- Comprehensive Corporate Performance Measurement – Economic Margin®
A useful corporate performance metric provides insight into what a firm is worth. For this reason, we developed the Economic Margin® framework to measure how well corporate management teams run their business. We analyze a company’s ability to generate cash-flows relative to their cost of capital and whether those cash-flows are allocated in a manner that increases or decreases shareholder wealth.
Applied Finance’s Economic Margin® does this by correcting for GAAP accounting distortions and assigning company risk to gain a complete, and standardized, view of a company’s underlying economic performance that can be compared over time, firms, and across industries.
| Economic Margin® Report vs EPS |
- Understanding Intrinsic Value – True Valuation Experts
Unlike price multiples which capture a relative static snapshot of fundamental data, we calculate an intrinsic value for every company in a strategy’s investable universe to understand the attractiveness of any company we consider as a possible investment based on its risk and competition adjusted future economic profitability and required investment.
Applied Finance’s valuation framework avoids the problems with traditional DCF models, which incorporate unrealistic perpetuity assumptions, by explicitly modeling the effects of competition through our time tested proprietary Economic Profit Horizon™ estimate.
Each week we perform 20,000 valuations, over 20 million since our founding, to understand the intrinsic value of every stock and identify the best investment opportunities for our portfolio.
| Intrinsic Value Factor® Report |
- Risk Mitigation – Avoiding Overvalued Stocks, Sector Neutral, and No Big Bets
While each strategy has different investment objectives, a common principle that runs through all of our strategies – is avoiding overvalued stocks. Applied Finance understands the valuation of stocks better than most investment managers. As a result, our goal is to build deep, diversified exposure to companies trading below their intrinsic value.
We abstain from making macro sector bets and instead focus our effort on identifying the most likely alpha generating stocks. In addition, our goal is to equal weight stocks within each sector when possible. This combination helps us provide a less volatile, long-term wealth creation process for our strategies.
Our aim is to mitigate risk and optimize our portfolios across stocks likely to create alpha over time.
4. Mitigating Behavioral and Data biases – Blending Quantitative and Fundamental Analysis.
Quantitative and fundamental research have their own set of strengths and weaknesses. Properly pairing them leads to a complete investment process that leverages the strengths of each approach and leads to unique advantages.
Institutionalizing a quantitative buy discipline to generate buy ideas mitigates behavioral biases by analysts that “fall in love” with a stock by providing an objective, consistent and repeatable process. This allows analysts to focus their efforts on a select pool of companies rather than having to “become inspired” to find buy ideas. Lastly, combining the talents of our experienced analyst team with our systematic valuation process, provides a very detailed expert check on quantitative data and a systematic check on qualitative opinions.