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We
believe that:
Investing is the arbitrage between the current price of a security and an
uncertain future value.
Companies with earnings growth potential offer a longer investment horizon,
providing the investor with more opportunity to realize excess returns.
There are inefficiencies in how the market values the long term prospects of
a company.
Risks inherent in an uncertain future can be reduced through
diversification.
People
The
senior professionals have significant investment experience, and
long-term working
relationships that predate the firm.
The
firm is 100% employee owned.
Process
Securities analysis employs a model that evaluates stock prices against company
financial metrics. Combining diverse factors contributes
to more consistent excess return.
Fundamental judgment provides the context for evaluating model output.
Portfolio construction favors stocks with the most attractive valuation ranking
constrained by benchmark structural characteristics.
Performance
The
diversified portfolios produce strong, consistent and scalable performance.
Pillar Pacific’s investment strategy is to build broadly diversified, low
turnover, risk-controlled portfolios that will generate consistent excess
returns over time. We implement an active, bottom-up investment process
that is efficient, systematic and scalable.
Security Analysis
Underlying our
securities analysis process is a 19 factor valuation model that is applied to a
capitalization-appropriate universe of 250 to 450 companies. This model
evaluates stock prices relative to company financial metrics and generates a
valuation score for each stock in the universe. Since not all factors add value
all the time, combining them into a portfolio of diversified factors makes the
valuation model effective under different market conditions and contributes to
more consistent excess return.
We use the same factors,
but with different weights, across the different equity products. For
example, since we believe that small cap investors purchase the perception of
future growth, the factors for the small cap growth model are weighted toward
earnings growth considerations. In contrast, the large cap growth model factors
are more evenly balanced between growth and valuation, as the market for large
cap stocks is relatively efficient at processing information.
Fundamental analysis provides insight into the relevance and accuracy of the
data in the valuation models. Our approach is to build a mosaic of information
evaluating such attributes as company products and markets, competitive position
and business drivers, risk factors, management track record and industry
trends. We also assess how the macroeconomic environment will influence a
company’s prospects. These results allow us to establish a subjective
probability of the predictive value of the valuation models.
The
combination of the valuation model and fundamental analysis identifies those
attractive companies we wish to add to a portfolio, validates the reasons for
holding those stocks we do, and identifies those stocks that we should remove
from the portfolio.
Portfolio
Construction and Risk Management
Portfolio construction applies an optimization process to the results of the
valuation ranking. We have a strong preference for holding the most
attractively valued securities (to generate incremental return), offset by a
moderate preference for conforming to the benchmark structural characteristics
(to control risk).
Diversification is another element of risk management. We diversify the
factors in our valuation model; we diversify the portfolio across economic
sectors; and we limit stock-specific risk by holding 80 to 110 positions.
Risk control is further enhanced by repeating the structured analytical process
regularly to ensure that timely information is reflected in the valuation
ranking and fundamental analysis, and that the portfolios remain well
diversified with the desired risk characteristics.
We will
purchase a stock when the valuation model and fundamental judgment indicates
that it is attractive, or when it will contribute to portfolio diversification
and risk reduction (even if other stocks appear more attractive). We sell
or reduce a holding when stock or sector weights become overly concentrated,
when valuation ranking or fundamental judgment indicates that the stock has
become less attractive, or to raise funds to buy more attractively valued
stocks.
The
long-term orientation and high conviction implicit in our investment process
translates into low portfolio turnover.
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