Our firm’s investment strategy is the culmination of Chief Investment Officer Matthew Haynes’ experience managing value-driven global and international equity portfolios with three large asset managers.
Versatility is among our key strengths. Over long periods of time and through very different market environments, we have learned that a flexible approach to global value investing is better able to capture the most attractive investment opportunities than one rigid formula such as a Discounted Cash Flow model. Matt has honed his flexible approach over the last 29 years, successfully targeting value-driven investment opportunities in the following three related categories:
i. Quality companies...
...earning sustainable and high returns on capital, led by competent and honest management focused on creating long term shareholder value, but only when the share price represents a material discount to what an informed buyer would pay for the entire business.
This is our preferred area of investment, as the longer term nature of these opportunities can create tremendous value over time as the power of compounding returns works its magic. Opportunities to buy high quality companies at large discounts are generally rare, but possible and require great patience.
ii. Deep value opportunities...
...in average companies — those in highly cyclical industries or unable to generate sustainable high returns over time — when their shares are deeply out of favor and undervalued.
Here we look for valuation support from tangible assets, oftentimes buying at prices below liquidation or replacement value in order to mitigate the risk of a permanent loss of capital. While these opportunities can offer great reward with low absolute risk, their below-average business returns over time compel us to sell when their business conditions are favorable again, and reflected in their valuation.
iii. Special situations...
...involving corporate events that we believe will unlock latent value.
Examples include restructurings, spin-offs, post-bankruptcy equity, recapitalizations, deleveraging and acquisition targets. Risk of loss is mitigated by the presence of a large discount to fair value, while return is more dependent upon the corporate event occurring than market related factors.
Special situations allow us to capitalize on corporate change and are typically not correlated with economic growth expectations or the general trend of global equity markets.
These categories are not mutually exclusive, since we prefer to invest in undervalued securities that also offer the prospect for corporate events or other significant catalysts to unlock latent value. In all three categories we have a strong preference for companies with clean balance sheets, generating substantial free cash flow, having a strong competitive position within their industry, low cost of production and a demonstrated attitude of shareholder value driven capital allocation.
We believe that the flexibility to invest across these categories enables us to continue to take advantage of whatever market environment may prevail in the future. Our experience with varied global market environments since 1993 has witnessed greater/fewer opportunities in each category through different economic and capital market cycles. This flexibility, and our experience navigating challenging periods in the past, has proven the test of time and is a distinguishing feature of our investment approach.