Growth Investment Philosophy
The investment philosophy for our growth products is based on the premise that stock prices will follow their respective trends in expected earnings and that significant alpha can be generated at the portfolio level by focusing on those stocks with the greatest magnitude of change in their consensus earnings. Also, because the revision process is gradual and comes incrementally over time instead of a wholesale fashion, we believe that this leads to a higher degree of persistence and greater predictability than other investment styles. Furthermore, by using this as a starting point in our process, we find where the market is most incorrect about the future earnings potential of a company and thus where the market is most inefficient. Combining this with strong internal research and focusing on the real potential earnings power of a company allows us higher conviction in our ability to generate excess returns as well as provide a better risk/reward dynamic for the portfolio.
The anomalies of estimate revision and earnings surprise are not immune to volatility and/or periods of underperformance, but we believe they are viable cornerstones for our investment process over a market cycle. The success of our process is based on the fact that 1) sell side analysts consistently make inaccurate short-term AND long-term forecasts, leading to earnings surprises and revisions to estimate forecasts, and 2) the market does not discount earnings events instantaneously, meaning that stock prices fluctuate and create opportunity.
The sell discipline is the key to the success of our investment process; the avoidance of negative earnings events is certainly a goal, but is not always attainable. Prudent responses to negative surprise and negative estimate revisions are essential to generating positive investment performance. The decision to sell stocks is made when the street estimates have caught up to our internal estimates and we begin to reduce our holdings based on reduced expectation of upside earnings surprises. Therefore, we are not only reacting to negative events, but we are proactively selling when the expectation for a positive earnings surprise is reduced.
Our style is more momentum than value or GARP, however it is based upon fundamental momentum as opposed to simple price momentum. Because we are buying companies we feel have the greatest variance in real and expected earnings, we are less inclined to use valuation as a tool when justifying a stock for potential purchase. By focusing on fundamental momentum and real earnings potential we feel that we can provide a better risk reward profile than those styles that emphasize price as a risk measuring tool.