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Investment Philosophy
The discussion below serves as a general guideline for fund investments. All buy and sell decisions are made at the sole discretion of the manager and in compliance with the investment policies set forth in the funds' prospectus. There is no assurance that manager's objectives will be met.
The Queens Road Funds are managed using a disciplined investment process designed to maximize after-tax returns while limiting volatility. Stocks are screened to identify companies with attractive current valuations and superior long-term prospects. The manager analyzes management ability and fundamental performance. Stocks believed to have the greatest potential for appreciation are included in the portfolio. The stocks of these companies are assembled in well-diversified portfolios managed to maximize risk adjusted total return. Security weightings and sector weightings are monitored and portfolios are rebalanced to maintain broad industry, sector, and position diversification while minimizing turnover.
The Queens Road Funds Three Stage Process:
- Security Selection
- Portfolio Creation
- Portfolio Management
Security Selection
Fundamental Analysis Focus
- Bottom Up Research
- Earnings, Earnings Growth, & Quality of Earnings
- Free Cash Flow Generation
Key Variables examined:
We begin by taking financial data from SEC filings, annual reports, and third party research services. We adjust for extraordinary items, remove non-recurring items and make other qualitative adjustments to produce earnings and cash flow numbers which we believe: 1. result from the operations of the firm’s primary business(es), and 2. are likely to recur. We then discount these earnings and cash flow numbers by an appropriate discount rate. From this, we determine the necessary growth rate to justify the stock's current market price. We then make qualitative assessments relating to the firm’s competitive position, management performance, and the firm’s ability to execute its business plan to determine the probability of achieving the necessary growth to justify the current valuation. This detailed analysis results in an opinion on whether the security can be purchased at a cost which is less than its intrinsic value.
Data Gathering and Analysis
In addition to compiling research from independent sources and major brokerage firms, our analysts perform comprehensive research which provides fundamental projections and qualitative assessments. This process seeks to produce data that represent recurring, high quality earnings and normalized free cash flow.
Discounted Cash Flow Model
The firm uses a discounted cash flow model which discounts Free Cash Flow at an appropriate discount rate. To determine a discount rate, we start with the firm’s weighted average cost of capital computed using the Capital Asset Pricing Model. This figure is adjusted by the manager to reflect changes in the firm’s balance sheet or business environment.
Determination of Required Growth Rate
From the above analysis, the normalized Free Cash Flow growth rate required to justify the stock’s current valuation is determined. Competitive factors, industry conditions, and management’s ability to execute its business plan are examined to estimate the probability of the firm exceeding this required growth rate.
Management’s Ability to Execute
A significant step in the process is our assessment of management’s ability to implement the firm’s business plan. Our approach examines management’s stated objectives and their ability to execute to achieve those objectives. High levels of turnover, frequent reorganizations, and an inability to profitably execute strategies will decrease confidence in management and the attractiveness of a stock. Quarterly conference calls are monitored to determine management’s strategic objectives and to monitor what they are doing to achieve these objectives. Managements are evaluated by monitoring the reported financial data to determine if management is successful at executing their business plans to achieve their stated objectives.
Portfolio Creation
Portfolios are assembled to maximize the benefits of diversification while maintaining the ability for return enhancement through security selection and sector allocations.
- No single security more than 5% of portfolio at purchase
- Typically between 50-60 holdings
- Broad diversification by economic sector
- Diversified holdings of securities in the portfolio to assure industry diversification within sectors
Portfolio Management
Diversification
The portfolio benefits of diversification have been shown to provide higher expected returns for a given level of risk when compared to non-diversified portfolios. For that reason, we seek exposure to multiple sectors and industries and we re-balance over-concentrations of individual securities to maintain an appropriate level of diversification to increase expected risk-adjusted returns.
Security Weighting
Generally, portfolios are managed so that no individual security makes up more than 5% of the equity value of a portfolio. Portfolio managers may allow increased concentration of an individual security. Sector Weighting
The portfolio will maintain exposure to the broad range of sectors in the economy. While the manager maintains considerable flexibility in determining relative weightings, the portfolios at all time will have a broad level of exposure to the various sectors of the economy. This high level diversification is intended to mitigate risk.Industry Weighting
Within each sector, the portfolio will maintain diversification across various industries. The manager will not engage in making oversized industry bets but will at all times maintain broad diversification across industries within each sector.
Philosophy Discipline
Our experience and knowledge has led us to adopt an investment philosophy that is theoretically sound, empirically valid, and intuitive. This philosophy does not change with overall market valuations or economic conditions. We will not attempt to time the market or economic cycle and we will maximize exposure by keeping portfolios near fully invested.
Sell Discipline
The Funds adhere to a buy and hold philosophy which has been shown to provide superior long-term returns. Careful security selection allows us to maintain long holding periods reducing trading and execution costs. However, several catalysts may trigger a sale:
- Significant Deterioration in Fundamentals
- Loss of Confidence in Management
- Stocks no longer in our Target Universe
- Significant Price Appreciation
Performance Monitoring
The portfolio is constructed such that the manager anticipates that the portfolio returns will compare favorably to the index in a down market and will trail the index in a strong market. Due to the nature of the over performance/under performance, the manager hopes to obtain, over longer periods (3 years+), greater returns than the relevant benchmark while assuming less risk. There is no assurance that the manager will achieve this objective.
Only by measuring risk levels and risk-adjusted performance are we able to determine the portfolio efficiency. To monitor this, several portfolio risk statistics are analyzed:
Key Portfolio Risk Statistics
These measures are computed using the fund's primary benchmark index as a benchmark and allows for a relevant comparison of portfolio returns to the benchmark.
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