Our Process
The investment process for identifying and selecting Quality Compounders relies on an extensive assessment of company fundamentals and developing an independent, differentiated view of risk-reward profiles.
Our process has four principal differentiators
Idea Generation
It begins with idea generation, where we define targeted industries and sectors where Quality Compounders are most often found. We then employ quantitative screens to narrow the universe further to focus our fundamental research and analysis on a manageable number of companies to monitor and assess. However, many ideas also come over the transom from other sources including other like-minded investors and our own research as well. Within that narrowed universe, we search for investment opportunities that meet our core investment criteria, including wide moats, long-term growth runways, rational capital allocation, and high return on invested capital businesses. We ask questions like “Can we accurately assess and understand a company’s competitive position five years into the future?”or “What is the market missing about the sustainability of capital returns?”
Portfolio Construction
The portfolio construction process is based on bottom-up fundamental stock selection and a rigorous valuation analysis, selecting those stocks that have the most attractive growth and return prospects and that are priced at an appropriate discount to our assessment of their long-term intrinsic value. We balance the risk-reward of each stock position and weight it accordingly.
Portfolio Management
We monitor and re-balance stocks to target weights based on potential upside performance and overall sector exposures. If a stock has a drawdown relative to the benchmark of 10%, that automatically triggers an investment thesis review. We employ a pruning discipline when there are more attractive opportunities that can replace less attractive holdings, though turnover remains low, with average holding periods of 3-5 years.
Risk Management
At a high level, we review stock, portfolio, and enterprise risk. Qualivian’s view is that long term out-performance is as much about preventing permanent capital losses as it is about profiting from time arbitrage and compounding. To emphasize capital preservation, we start by investing in Quality Compounders, which have strong franchise characteristics. At the position level, risk management starts with our culture of openly debating the merits of investment theses and positions. We limit position sizes to 10% of the overall portfolio. In addition, if a stock drops 10% relative to the benchmark, it is automatically placed on thesis review, which may or may not lead us to change our position, but institutes a forced discipline of monitoring the downside risk to our positions. At the portfolio level, we make sure that no sector makes up greater than 30% of the portfolio. Second, we do not use leverage or short stocks. Finally, we monitor correlation among positions, end-factor risks, and tail risks.