Equity Research Process

Internally generated investment research is a cornerstone of our firm.

Our research process begins with an objective, quantitative evaluation of a broad array of stocks. We use a proprietary research tool called Fundametrics®, a computer-based system we began developing in the 1980s and continue to refine to this day.

Through this system, we screen and rank stocks according to specific valuation criteria. Fundametrics® defines our top 10% most attractive investment ideas, independent of sector. Next, we screen this group for diversification to protect against extreme overweighting of any given sector. These steps narrow our pool to potential “buy” candidates that meet our quantitative investment criteria.

At this point, we select stocks in two ways. One method relies on a qualitative overlay, whereby our analysts review the inputs into Fundametrics® for accuracy and reasonableness, as well as assess the specific company’s management, competitive position, balance sheet, and market expectations. We prefer stocks that have fallen out of favor but exhibit a combination of attractive attributes. This qualitative overlay typically reduces portfolio turnover and generally is most appropriate for tax-sensitive clients.

The second method relies solely on Fundametrics® for buy and sell decisions, aside from an analyst’s review of the inputs for accuracy and reasonableness. This approach buys our best ideas more rapidly and sells stocks more quickly, thus increasing turnover which is generally more appropriate for larger tax-deferred accounts.

In Fundametrics®, we use numerous investment factors for screening stocks. These are both simple and complex formulas that determine the relative attractiveness of the stocks we are evaluating.

While over 30 factors are used, we rely most heavily on a core of 12 which have proven to be the most discriminating and non-correlated, and when taken in the aggregate, tend to produce the stocks with the best return potential. The exhibit shows those factors, each of which has a long-term and a short-term component.

The factors we use will change over time but not often and not without good justification.

For stocks in client portfolios, we continue to measure both the quantitative and qualitative indicators. When a stock falls to the bottom 30% of our valuation process (or bottom 50% for our pure Fundametrics®-driven method), the stock no longer meets our criteria, and we implement our strict sell disciplines.