web analytics

Finding quality investment managers is one of the most important decisions advisors make for their clients. We acknowledge that this is a daunting task, as roughly 80% of active managers fail to outperform their benchmark.

BIGGER DOES NOT ALWAYS EQUAL BETTER: Advisors have typically placed a high emphasis on name recognition while paying little regard to process. Many larger managers with a sizable marketing presence often fall victim to their focus on distribution rather than process. The result is a lack of investor confidence in the ability of a manager to replicate past returns. While name brand pedigree may soften the blow in times of underperformance, advisors often overlook undiscovered yet more skillful managers such as Applied Finance.

Other rarely mentioned threats larger manager face in replicating past performance are liquidity constraints and slippage. For these reasons, we will close our large cap strategies to new investors when we reach $15 billion in assets allowing us to take advantage of the best investment opportunities in the marketplace.

Selecting larger managers offering “mass produced” investment products is often the easier sell to clients and sometimes the more comforting choice for advisors. However, opportunities to gain a competitive advantage are often missed by overlooking smaller managers constructing quality portfolios with the passion and craftsmanship of true artisans.

“You can’t beat the market, if you are the market.”
– Daniel Obrycki, Co-founder of Applied Finance

SELECT MANAGERS THAT HAVE A TRUE COMPETITIVE ADVANTAGE: Today, most money managers utilize common earnings-based measures of corporate performance and value, which are suspect and easy to manipulate. Applied Finance’s proprietary Valuation Driven investment process goes beyond the limitations of earnings-based approaches and incorporates the four major tenants of capturing value: Investment Growth, Economic Profitability, Risk, and Competition.

By focusing on economics, not accounting, Applied Finance truly understands how well a firm is performing and what price should be paid for that performance. Applied Finance believes a focus on valuation, not “value/cheapness” is critical to maintaining a sustainable and repeatable edge in creating long term alpha.

“Traditional portfolio managers utilize earnings and perpetuities. Applied Finance’s valuation model focuses on cash flows and solves the perpetuity problem.”
– Daniel Obrycki, Co-founder of Applied Finance

Using this consistent Valuation Driven approach, we have performed and archived over 20 million live valuations since our inception. This vast amount of data gives our analysts an unbiased edge in understanding how markets reward or punish firms and identifying companies trading at a discount to intrinsic value. While other investment firms claim to be intrinsic value investors, they lack the objective rigor and insights gained from our deep database of valuations.

VALUATION DRIVEN RESEARCH IMPLEMENTATION: There are distinct advantages to implementing a sound quantitative and qualitative fundamental investment process. By using a proven valuation model to generate a list of attractive securities, our analyst team can mitigate behavioral biases (falling in love/panic selling) when researching an investment idea. Our analysts leverage our time-tested model and add value through a series of checks to ensure the efficacy of our model outputs. By remaining close in sector weights and equal weighting each holding, our strategies are focused on stock selection and avoid performance swings attributed to sector bets. With over 78% active share, investors get exposure to true active management.

An emphasis on risk mitigation is why our strategies do not make extreme sector bets and focused on identifying the most undervalued companies in each sector. Our firm generally focuses on identifying opportunities at a company level and avoids making macro or sector bets. We then diversify holdings in each sector to mitigate single position risk and ensure that the stocks in the portfolio are not highly correlated. Each holding normally represents a relatively small portion of the total portfolio.

Because of our high conviction in our stock selection process, we have maintained extremely low turnover of less than 15%. The result is a tax conscious approach, ensuring turnover does not have a meaningful impact on overall portfolio performance.

“The greatest risk to your stock portfolio is owning overvalued equities.”
– Rafael Resendes, Co-founder of Applied Finance

ANALYST TEAM CONTINUITY: Our analysts are experts in the Applied Finance Economic Margin methodology and gain an edge from leveraging our live valuation database when analyzing existing holdings or new ideas. Our team analyzes securities from a consistent perspective, which leads to better answers as evidenced by the consistent performance of the Valuation 50 and Valuation Dividend strategies.

With a 17-year average tenure of our analyst team and a live valuation database going back over 25 years, we are uniquely experienced in identifying companies trading at discounts to intrinsic value. Our analysts have routinely demonstrated the value that they add to our selection process as evidenced by long-term outperformance through various market cycles. All Applied Finance analysts employ the same buy/sell discipline resulting in investment consensus when making any changes in our strategies.

“I’m still the new guy 15 years later”
– Derek Bergen Quantitative Research Analyst and Partner

PERFORMANCE IS THE RESULT OF PROCESS: Applied Finance strategies have been top performers amongst their peer groups and have delivered long term returns above their benchmark. While performance is an important part of manager evaluation, there is no way to determine if past performance is repeatable without confidence in the underlying stock selection process. Process, more so than performance, is the distinguishing factor between luck and skill.

“The commonly-accepted meaning of risk in investment management has been tortured to primarily emphasize benchmark tracking error as a means of manager self-preservation. Skilled managers not only tolerate tracking error as a means to outperform, but they will use track records based on this expertise to grow assets, satisfy existing clients, and dominate peers that attempt to justify asset management fees for low-quality investment solutions.”
– Derek Bergen Quantitative Research Analyst and Partner