Investment Philosophies
Does anyone know about how different funds differentiate themselves in their investment philosophies? Looking to learn how each firm thinks about investments (what do they focus on finding? Margins, moats, scale, trends?). Has proven difficult to find just perusing through their websites and haven't found a good thread on it here yet so figured I'd start one.
For reference, interested in L/S, Long only, Crossover, and pretty much anything other than Macro funds, as the question doesn't really apply to them (they don't really work based on fundamentals in the way other funds do, they are investing in line with a macro thesis/strategy, not like what features give Hershey's a sustainable moat).
If a firm philosophizes or talks in reference to Marcus Aurelius or some stupid crap it’s prob underperformed for last decade
ha ha 😄
FWIW, Aurelius has done pretty well…
Every PM/CIO has their own style that usually falls under: value/quality, growth/momentum, or some type of arb play. I'm discussing discretionary managers and not quant strategies (which are more factor driven; e.g. not very interested in the specificity of a single name).
1. Value investors look for companies that are "unfavorable" either thematically (e.g. brick & mortar retail vs. e-commerce), financially ("stock taking a hit because of a substantial earnings miss"), or quantitatively ("stock is trading a p/b of 0.7x vs. peers of 0.9x"). Your due diligence process is about finding gems in a pile of junk, so you are going through many companies and should expect to find 2/10 that might be interesting (you think this company has a relative advantage in the B&M space or is transitioning to e-commerce retail and is finally turning the corner, or that the earnings miss is because of investment or restructuring that will result in a more scalable business in the future, or that the valuation should converge a la mean-reversion). Quality investors seek companies that have strong balance sheets, high cash eps/non-gaap eps ratio, stable management, etc. So your workflow in this case is more about determining if they are growing faster than peers or will come up with a plan to pay shareholders (buybacks, dividends, etc.).
2. Growth investors typically focus on industries seeing secular growth. TMT & consumer is seeing higher revenue growth rates than most other sectors, hence why they are the common targets of "growth" strategies and their investors. What you are primarily looking for here are companies that are growing faster than the pack, and then adjusting your valuation to see what happens if growth is 5% or 10% higher (what's the impact to TV and, ultimately, today's stock price). Because you like the industry, you generally are loading on beta and are peeling off the weaker companies (e.g. you assume you have a pile of gold, and want to weed out any fake stuff). Momentum investors are somewhat similar, except they are paying attention to either a) earnings momentum (sequential improvement in yoy revenue, ebitda, and eps) or b) price momentum (6-12 month price change), or c) a combination of the two. Again, because you like the beta of the pool of companies, you assume each are good and your DD weeds out the weaker links.
3. Arb-y stuff can be relative value (p/e is 3 std from normal spread relative to industry or peer), corporate action relation (merger/risk arb), mean-reverting strategies, and other discretionary strategies that rely on quantitative data. There are exceptions to this of course.
At the end of the day the reason why managers try to pick stocks or trades is because they believe they have a process that improves upon the naive (multi factor model) expected return of those stocks. All of the phrases you hear about "quality of earnings" or "moats" etc., are just extensions of these underlying philosophies. For example, that a company has a moat in and of itself does not make it a good investment. However, if you start adding information such as "wall street estimates are very low because they are based on weak margins due to rising competition" suddenly having a moat becomes a quality that might serve as a counter to the prevailing expectation.
To get some practice, run a screen of the stocks that generated the greatest and worst returns in the S&P 500 over the past five years (top 5 of each side) and ask yourself 1) what would you have had to have seen in order to have bought the winners then? and 2) are any of the losers a contrarian play (is the market too pessimistic? and why?)
Must follow all Neanderthals on WSO
I miss being king kong
Optio quisquam est ut incidunt autem qui. Ad est labore cum assumenda ad saepe eos.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...