Model Portfolio crossy:CIAF

CIAF is my Industry Analysis Fund. The fund attempts to generate excess returns by integrating tools and techniques of corporate strategy, industry analysis and microeconomic background research into the portfolio management process. The portfolio is the result of a discovery process, targeting attractive companies (can be growth and value depending on market environment) among undervalued players in industries with a positive midterm outlook.

Sector/Style Selection:

Diversified. May invest in small-caps so volatility may be higher.

Primarily, I do group analysis (Industry analysis), similar to the techniques applied by the followers of strategic management methods.

Regarding my investment "style" in the growth vs. value domain, I would not like to tie my hands. In a diversified fund, I usually would pursue both goals, if possible simultanously. Also, the attractivity of VALUE or GROWTH stocks per se seems to be highly dependant on the broader (macro)economic environment. The slump in 2001-2002 for example prompted me to move a good deal of my real life $$$ into more defensive stocks such as consumer non cylcical (VALUE, but basic growth appeal may also be found there), medical devices (GROWTH, value criteria difficult to satisfy for valuation ratios of this group is one of the highest currently on the market, stability of demand), and drugs & biotech stocks (Growth, decoupling from economic climate, etc..)

Concentration:

The fund attempts to address dangers of over diversification as well as those of over concentration. As such, it will generally hold no more than 40 portfolio positions. Individual portfolio position may vary in size - attractive investment opportunities with very low associated risk may warrant materially higher exposure.

The fund does NOT invest in the leading firm(s) of a given industry (in order to avoid paying the associated premium in valuation). This should also allow the fund to capture more growth potential of an industry, as leaders in market share tend to experience lower growth rates. For example, it is more difficult to grow the top line of a diversified $10bn company by 10% than growing a focused $100m firm by 20%.

Buy selections:

After I select target industries (subject to change), I do intra-industry comparisons. Valuation criteriae either quantitative (historical ratios) - intra industry or future value oriented (market potential) due to underlying company strategy (qualitative). I apply a lot of financial ratios to all members of the group and then look at the individual profiles on several dimensions (growth, gross margins, gross margin development, price/sales, Price/Cashflow, Price/Book).

I usually shun Price/Earnings ratios because PE are a residual value. I also try to preempt significant developments - which is of course highly speculative, but not pure guessing - I would call it "educated" guess. Very often from moves firms in an industry have made, you might be able to infer their next moves. Often you can talk to CFO/IR on hypothetical future scenarios. This fills out the empty spots in your puzzle and you can invest accordingly. I would call this "soft" data - which I consider very important - almost on par with the hard facts commonly used almost exclusively (financial ratios, industry growth etc.) Goal is to find outperformance candidates, thus I'm usually not investing in leaders. I like to find those companies that either become challengers or those that might likely be acquired by leading firms in an industry I use some TA concepts but not very strict. Tom de Mark's indicators I consider quite able to detect bottoms, not so much tops. Candlestick chart patterns are another interesting methodology to find good selling points IMHO.

Additionally, the fund invests in special situations that promise extraordinary, mostly short term profit (recapitalizations, post Chapter 11, strategic changes etc.

But as the name implies "Industry Analysis Fund" - I would like to note that the fund caters to SOFT DATA (and conjectures) as much as to HARD (mostly historic, numerical) FACTS.

Sell Criteria:

Positions/companies that reach valuation of industry leaders, are acquired, detoriating fundamentals etc.

Posted by crossy at 6:46 PM | Permalink