ClearTrack Investment Philosophy and Process


Objective

Long-term capital appreciation with less volatility than the broader market

Investment Philosophy

Investors' behavioral biases create market inefficiencies. These inefficiencies are often the result of market participants being inordinately influenced by near term events and extrapolating current conditions onto future valuations. Even high quality franchises are not immune to short-term biases and valuation discounts. Our passion is finding great businesses that have temporary fallen out of favor and can be purchased at attractive valuations.

Investment Process

Valuation Driven Companies trading at discounted valuation metrics are identified using various screening processes. Valuation metrics include Price-to-earnings, Price-to- TrueCashflow and Price-to-Adjusted-Book-Value. Companies trading at a 20% discount or more relative to the broader market as well as their historically ten year valuation averages will be considered for purchase.

Quality Focused

All holdings must demonstrate a sustainable competitive and economic advantage.Companies must show the ability to produce positive and relatively predicable cashflows regardless of economic conditions. Returns on invested capital (ROIC) verses cost of capital should be favorable for the foreseeable future.

Investment Thesis

Each holding has a clear and succinct thesis that describes what will cause investor perceptions to improve over the next 2-3 years that will result in valuations normalizing.

Risk and Volatility Control

Principal preservation is as important as capital appreciation. For this reason we focus on companies with the following characteristics:

  • History of consistent dividend payments
  • Strong balance sheets and credit metrics
  • Insider buying and ownership
  • Lower beta

Supporting Research

Value vs. Growth

“Value and Growth Investing: Review and Update.”, Louis Chan and Josef Lakonishok, Financial Analysts Journal, January/February 2004

Abstract: A comprehensive look at the long-term outperformance of stocks with low price-to- earnings and price-to-book ratios.

“Contrarian Investment, Extrapolation, and Risk.”, Josef Lakonishok, Andrei Shleifer and Robert W. Vishny” , The Journal of Finance”, December 1994

Abstact: The article provides evidence that value strategies yield higher returns without being fundamentally riskier.

“Low-P/E Investing: Why It Works and How to Capture the Returns.” William E. Jacques, CFA, AIMR Conference, Volume 1993 issue 6.

Abstract: The author provides a framework for why low-P/E stocks have outperformed and why they will continue to achieve superior performance.

Quality Businesses vs. Turnarounds

“Predictability Bias in the U.S. Equity Market.”, Lex C. Huberts and Russell J. Fuller, Financial Analysts Journal, March/April 1995

Abstract: The authors compare performance for companies with more predicable and consistent earnings verse those with historically volatile earnings streams. His findings conclude that companies with more predictable and consistent earning outperform the broader market.

“Buffet's Alpha.”, Andrea frazzini, David Kabiller, Lasse H. Pedersen, National Bureau of Economic Research, Working Paper No. 19681, November 2013

Abstract: A review of how Buffet invests and what drives his outperformance. One of the characteristics of his style is a strict focus on high quality businesses that can deliver consistent cashflow streams.

Risk and Volatility Control

“The Low-Volatility Anomaly: Market Evidence on Systematic Risk vs. Mispricing.” Xi Li, Rodney N. Sullivan, CFA and Luis Garcia-Feijoo, CFA, CIPM

Abstract: The authors examine 46 years of data to determine why low-volatility stocks outperform stocks with greater price movement. They determined that the high anomalous returns of low-volatility portfolios cannot be viewed as compensation for some hidden factor risk but simply due to mispricing from investors preferences for high-volatility stocks.

Investment Intelligence From Insider Trading. H. Nejat Seyhun, MIT Press, 2000

Abstract: The author studies relative performance for 12 month periods after a corporate officer buys stock in the open market. The study concludes that there is over 700bp of outperformance for stocks with insiders buying vs. selling.

The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New. Jeremy J Siegel, Crown Business, 2005.

Abstact: Detailed review on why fundamentally driven investment styles have outperformed growth and momentum investing. Page 128 provides a 45 year performance review of dividend paying stocks verse non-dividend. The study found the not only do dividend paying stocks outperform but they are also less volatile.