As passive ownership continues to grow, it has introduced structural inefficiencies in how capital is allocated, rewarding company size over merit.
Market cap weighting directs capital toward the largest companies, regardless of their Intrinsic Value or Stewardship attributes. This flow driven dynamic amplifies mispricings, leaving investors overexposed to speculative companies.
SAFER MARKET™ is a scientific approach designed to provide broad market exposure, while seeking to outperform with low tracking error and better risk characteristics.
Deselection Process
We begin with a broad market universe such as the S&P 500 or Russell 1000. From there, we apply a systematic framework grounded in two core principles: Intrinsic Value and Stewardship.
- Intrinsic Value Filter: Each company prices is compared against our forward-looking estimate of intrinsic value built from Applied Finance’s proprietary Economic Margin® framework. Companies trading at large premiums to intrinsic value are removed. These firms often reflect speculative excess and are more prone to price corrections and long-term underperformance.
- Stewardship Filter: We assess management’s ability to allocate capital effectively. Companies that pursue unprofitable reinvestment strategies, rely heavily on external financing that dilutes shareholders, or report positive shareholder equity while their intrinsic value estimate falls below book value fail this test.
- Reweight by Intrinsic Value: The remaining companies that are attractively valued and demonstrate disciplined capital allocation are reweighted based on intrinsic value rather than market capitalization. This approach of tilting to undervalued companies preserves broad market exposure while improving portfolio quality, lowering drawdown risk, and enhancing long term return potential.
SAFER MARKET™ Exposure
The result is a portfolio that stays fully invested while removing the speculation that weakens long term performance.
By eliminating companies that are overvalued and poor stewards, the strategy captures the strength of broad market exposure with lower volatility, shallower drawdowns, and more consistent compounding.
Over time, this disciplined process has delivered superior risk adjusted returns with low tracking error, confirming that removing speculation is just as important as selecting opportunity.
Contact us to learn more about our SAFER MARKET™ investment strategies.