Mr. Wescott: Glenmede Investment Management is a wholly owned subsidiary of Glenmede Trust Company, and we're responsible for institutional asset management and mutual fund management. Within GIM, as we like to call it, we have about 6 billion under management. Glenmede's philosophy is that all products are structured with a quantitative ranking system tailored towards the individual strategy, and then fundamental management takes over.
In large-cap value, we use traditional value statistics that have proven to be effective over time. The variables have been refined based on our experience to make them more effective. We look at the stocks that are identified as the most attractive on a valuation and fundamental basis, and we either sell or avoid the ones that are considered least attractive.
In terms of our positioning relative to a lot of our competition, we are more of a balance of valuation and fundamentals than some other pure value or deep value managers. A lot of pure value or deep value managers look at things in a much more statistical way by looking at price in relation to either earnings or cash flow or book value. We do that too, but as I said earlier, we've tweaked some of the variables so that we look at it more as if we were buying the entire company. On top of that, as opposed to some people beginning and ending with price to earnings or price to cash flow, we start there, but we end with the valuation and what are we getting in exchange for that. It's my experience that over longer periods of time, fundamentals drive share prices; stocks don't go up just because they are cheap, but because things worked out better than expected. We want to make sure that we get an opportunity to buy things cheaply and also to hold them as long as their fundamentals develop in a favorable fashion, especially relative to expectations. Think of it in terms of a pendulum swinging between value and fundamentals.
A good example was last year, where there were quite a few cheap stocks. In that instance, the degree of undervaluation was so attractive that all we had to do was make an assumption that business was going to come back at some point, but not necessarily immediately, because the valuations were so tempting. Move forward a year to the present, and we have to ask if we are paying a fair price and is the company likely to be able to deliver a result that's at least as good if not better than what people are expecting, and continue to do so through the rest of the recovery. The pendulum has swung more towards the middle. And later in the cycle, we'll be much more interested in trying to avoid companies that are going to have negative surprises regardless of the valuation metrics.
That's where a lot of people get caught in what is often referred to as a value trap - the p/e looks low or the price to book looks low, but they end up buying a company that's embarking on a consistent stream of negative surprises right into the next recession. We don't want to do that. We've seen that happen often enough, and that's a mistake that we can reasonably anticipate and avoid.
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