Absolute Value® investment philosophy
Absolute Value® is a highly disciplined, proprietary investment approach developed by River Road. We believe it incorporates proven and enduring principles of value equity investing, with an avoidance of the pitfalls associated with the Deep Value and Relative Value investment styles.
The objective of River Road’s Absolute Value® investment philosophy is to generate attractive, sustainable returns over the long term, with an emphasis on minimizing downside portfolio risk.
Our Absolute Value® investment philosophy is distinguished by four principal tenets:
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A focus on excellent companies trading at compelling prices
We seek well-managed, financially strong companies that generate predictable and sustainable cash flows and trade at attractive discounts, rather than challenged businesses trading at deep discounts or overvalued businesses that are only cheap relative to their higher-priced peers
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Bottom-up portfolio construction
We emphasize bottom-up portfolio construction based on River Road’s specific Absolute Value® investment criteria
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A focus on less efficient areas of the equity market
We seek less efficient areas of the market, including smaller cap companies, companies whose shares are temporarily out of favor, and companies that are not yet promoted by Wall Street analysts
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Risk aversion
We employ a balanced approach to diversification and a structured sell discipline that seeks to reduce portfolio volatility and the risk of permanent loss of capital
Investment process
Idea Generation
We employ two research methodologies – Systematic and Dynamic.
Systematic Research: Screening of the firm’s principal databases.
Our watch list (including former portfolio holdings)
Quantitative screening through FactSet (proprietary stock screens): Identifies stocks that best exhibit the Strategies’ critical criteria
Other research
Dynamic Research: An active search for attractive candidates among a myriad of sources, including:
Investment media
Industry research
Competitor analysis
SEC filings (10-K/Qs, 8-Ks, proxy statements, insider trading (Form 4 filings), share repurchases/dividend increases, etc.)
Various other contacts and resources established by the portfolio management team
Security Analysis
We build portfolios in house, from the bottom up, making security-specific research central to our process. At the core of River Road’s Absolute Value® approach is a systematic method for assessing the risk/reward characteristics of an investment. The goal of the research process is to formulate two outputs from which an investment decision is made – conviction rating (risk) and discount to value (reward). A stock’s conviction rating combined with its discount to value determine not only whether the stock qualifies for investment, but also how the stock will be sized within a portfolio.
Conviction Rating
The conviction assessment ranks each of the critical criteria, listed below, on a scale of 1.0 (highest/best) to 5.0 (lowest/worst), which are then aggregated into an overall conviction rating.
Valuation: Confidence in forecast assumptions
Attractive business model: Understandable, predictable, and sustainable; high returns on equity and invested capital; and reasonable growth prospects
Shareholder orientation: Capital allocation; management alignment
Financial strength: Liquidity and leverage; hidden assets; and free cash flow yield
Environmental, social, and governance (ESG): Practices; policies; and disclosure
Discount to Value
A stock’s discount to its assessed valuation is a proprietary measure that represents the expected upside or available reward within the valuation time horizon of a stock based on our fundamental approach to security valuation.
Portfolio Construction
The stocks purchased are those we believe best meet our selection criteria, offer the greatest potential for appreciation, and provide appropriate portfolio diversification.
We employ a proprietary sizing model that considers the security’s discount to value, overall conviction, and breadth of value in the investment universe.
We employ a proprietary sizing model that considers the security’s discount to value, overall conviction, and breadth of value in the investment universe.
Sell Discipline
We believe that the key difference between a losing strategy and a winning strategy is that losers make big mistakes and winners make small mistakes.
Our sell discipline is designed to help keep the inevitable individual mistakes from causing large, permanent losses of capital in the broader portfolio.
We avoid averaging down on losing positions once a target position is established.