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Strategy: Value Investment Partners
The objective of the Value Investment Partners (V.I.P.) Small Cap Value Strategy has been the same since 1986— to purchase shares of small cap companies with good, long-term prospects and a demonstrated history of management integrity that trade at a wide discount to intrinsic value. Fundamental research and absolute, rather than relative, valuations drive the stock selection process. Concentrated portfolios of 30-35 names are diversified relative to macroeconomic variables and individual security allocation limits, not benchmark weightings. We seek to attain the highest level of absolute return with the lowest level of risk over a full economic cycle.
We attempt to buy shares of small cap (<$2 billion), good quality companies that are selling at dislocated prices. Companies must meet seven quantitative and qualitative criteria to quality for purchase—1) shares sell at a low P/E so earnings yield exceeds AA 20-year corporate bond yield on forward 12-month earnings; 2) earn an ROE consistently above 15%; 3) utilize financial leverage below industry peers; 4) generate positive free cash flow to internally fund growth; 5) demonstrate consistent historical earnings growth; 6) have an achievable business plan to grow revenues and earnings faster than inflation; 7) employ conservative accounting and design management incentives aligned with shareholder interests.
We manage concentrated portfolios of 30-50 names, equally dollar weighted at cost. Both portfolio managers must agree on purchases. Portfolios are diversified relative to macroeconomic variables—interest rates; cost and availability of labor; GDP growth rate; inflation rate; value of US$ relative to other currencies; cost and availability of material inputs, including energy. Our goal is to minimize the portfolio’s exposure to dramatic changes in any of these factors. Portfolios are not managed to a particular benchmark. Stocks are sold when they appreciate to 150% of the P/E at purchase or when they reach 85% of private market value. Positions are trimmed when they become 5% of the portfolio if the stock has not met our sell criterion. Our average holding period is 2-3 years.
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