Ms. Peche: I think it's worth mentioning that as we compete for some of this institutional business, I come across the firms we're stacked up against and what's jumped out at me is that the people at Alta who are directly involved in the day-to-day management of the portfolios are the most senior people in our organization. They all have over 15 years' experience and they're all principals in the firm. I think that's fairly unique.
TWST: Tell us about your portfolios.
Ms. Peche: They both have the exact same strategy. The two that are out there
and even the small cap that we're incubating all have the same strategy,
philosophy. There's only a difference in market cap.
TWST: Would you tell us about your investment process and what criteria you
search for in potential holdings?
Ms. Peche: Just starting with the investment philosophy, the way I see it is
there are two big tenets of our investment philosophy. One is that a company's
intrinsic value is not consistently recognized by the market. Looking back over
the last six months, it's clear that there's no way that the large market swings
we saw were reflective of a true loss or a gain in value. Therein lies the
opportunity. We are not market timers, we're not traders, and we look to price a
company's value for the long term and invest based on that. So that's one tenet.
The other tenet is that cash flow is really what we need to look at. We have a
proven track record of preserving capital and maximizing returns with less
volatility, and I think all of that directly stems from the fact that we focus
on free cash flow growth rather than earnings growth. Earnings in our view can
be easily manipulated, they don't necessarily reflect the true sustainability of
the business, and cash is ultimately what's returned to shareholders. So all
equal, a company that produces more free cash flow is going to be more stable,
it's going to be more flexible, it can better weather adversity and therefore it
will be more valuable.
The last six or nine months that we've been through really drive this point
home. So that would be our philosophy overall.
We have several parts to the investment process: screening, research, nomination
and then the actual portfolio construction. We start the research process with
the screening step. We screen on specific criteria and these criteria have been
identified by us as reliable indicators of future performance. These are
criteria that are all fundamentally based and they are a combination of growth,
profitability and valuation metrics. So it's different variations of EPS growth,
sales growth, return on equity, return on invested capital, operating margin,
valuation, price to earnings, price to sales, etc., and then market cap as well.
Having reduced our pool of our potential universe into a much more manageable
size, which we do every week, that's when we start the actual research part of
our process. The research part is where we seek to actually identify that true
intrinsic value that I was talking about, and what that potential is for share
outperformance going down the road. So we're modeling at this point; it's a
quantitative and a qualitative process. Based on what the cash flow generation
has been in the past, we're assessing a company's ability to generate cash flow
going forward. We have a proprietary model, it's a free cash flow model, and our
goal with this model is to be as conservative as possible.
I think it's important to point out we aren't sellside analysts. I worked on the
sell side for eight years and there I was trying to predict earnings to the
penny and here we don't do that at all. In fact, we're certain we'll be wrong -
we hope we actually underestimate the cash flows. So we're really dumbing down
this model to be as conservative as possible.
So our thinking is that if we find a company that has real cash flow growth that
is faster than the S&P 500 average cash flow growth based on very conservative
assumptions and we find that this cash flow stream is trading at a discount,
then we feel we have a higher probability of outperforming for each of our
names. In terms of portfolio management, it's all a probability game. So, yes,
we are going to be wrong on some names, but if we're right on the majority, we
should have good outperformance going forward.
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