Mr. Corn: GARP has been around for a while and certainly made famous by some great investors, like Peter Lynch. GARP has always been defined as growing at a reasonable price, and we've added in a bunch of what we call "quality factors." Companies we consider are required to have a strong balance sheet, less-than-peer-group-oriented debt and other comparisons, making sure that the company is quite strong. Generally most GARP investors look for solid earnings growth, revenue growth and things like that. That worked all well and good until we entered the second half of 2007, where all of a sudden companies were having reductions in their earnings; they were having reductions in their revenue, and that continued through just about the first half of 2009. Essentially we needed to find the firms which are the best companies to own on behalf of our investors. Here is another thing about Beacon Trust - each investor has a unique asset allocation based on their absolute personal needs, and they work with an individual portfolio manager making sure that they are always in the right balance. If they have cash needs, we'll allocate more cash.
I run the equity side of the house. And in the strategies I manage, I'm always fully invested. That doesn't mean a customer will be. They'll be if they have our large-cap value core or an international product. What I supply is how to be fully invested in those strategies with whatever percent of the allocation of the clients' overall money that is appropriate.
Back to GARP. Basically what's happened is that companies had reductions in earnings and revenue. What we needed to do was insure that certain basic elements or screens are there - liquidity and again debt less than peer group, and other quality screens like that. Once that's done, one has to determine what companies are growing at a reasonable price or which actually truly exhibit value, especially when earnings are going down and revenue is going down. What we did is we came up with what we refer to as our "turnaround model," which uses multiple factors to determine investability. If a company lost 500 million in Q4 of 2008, and then they lost 200 million in Q1 of 2009, they are in the midst of a turnaround and we would score that event with some positive points. Of course, everyone is looking for these companies to get back into the black, and when that occurs, that's scored with additional points. Essentially what we've done is taken a new zero point. We've said, "The world begins on this day if all the quality factors already hold." That way we can take a company that lost money, that's on its way back to profitability and get in before it's achieved from small profits to large profits because by the time large profits have once again been achieved, we will have missed a great deal of the stock run. Our turnaround model helps us identify the firms with the greatest potential to turnaround.
We implemented this addition late in February of 2009, and that has provided our investors with benchmark-beating returns this year. Using this model will continue until we ever get back to a norm where we can locate one- and three- and five-year earnings growth, and revenue growth. We've done something similar with revenue. We've done it with margin and essentially those are some of the factors that we are looking at that are statistically important to us. Once all the screening is complete, we then go in and we spend a lot of time looking at the companies. Essentially we run our multifactor models everyday, look at all the companies we own and the strength of them, and then we create an on-deck circle. If a trade is needed to be made, we always knew where we are on our on-deck circle so that the fundamental work can be done, the traditional research can be done over time before a trade is needed. That's it in a nutshell.
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