AMI Asset Management generates investment ideas from a variety of sources, and we take pride in the fact that our selection process is not limited to quantitative screens relied upon by many managers. While our process does utilize screens, we also uncover ideas through a deep knowledge of recurring revenue industries (Healthcare & Staples), conversations with company management and industry experts (e.g. doctors), and through “feet on the street” research (walking grocery store aisles for example).
Once a candidate is identified, it is subjected to a rigorous due diligence process that examines its product portfolio, industry and competitive dynamics, and fundamental metrics, among other factors. We believe that quality, growing companies can be bought at a discount to intrinsic value, which generates alpha over the long run. We determine a firm's intrinsic value through a combination of discounted free cash flow valuation and earnings multiple analysis. We view securities with a 10-20% discount as a strategic sweet spot; discounts greater than this are typically associated with “value” investments and discounts less than this tend to have limited upside. All valuation work is completed internally.
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Asset allocation is determined by the Investment Committee, which follows a bottom-up approach. Given our focus on companies with recurring revenue business models and this bottom-up approach, portfolios are typically overweight Consumer Staples and Healthcare, and underweight Technology and Consumer Discretionary. Sector weights usually remain in a tight range but will fluctuate somewhat based on the quantity of attractive investments. We have a defined portfolio construction methodology which guides the portfolio manager’s decision making.
AMI Asset Management believes that the focus on recurring revenue is the primary risk control, given that these companies have less earnings volatility, and thus tend to contain inherent downside protection. However, AMI has also put into place additional risk controls to avoid too much exposure to market sectors or position allocations.
Sell decisions are most often triggered by deteriorating fundamentals and generally result in a sale of the entire position. These deteriorations can include factors such as worsening industry or regulatory conditions, weakening competitive positions, structural margin changes, and balance sheet erosion, among many other factors. We will allow “winners” to appreciate but typically begin to trim holdings when they exceed 10% of our estimate of intrinsic value. We will continue to hold smaller positions in securities that are performing poorly if the growth story and fundamentals remain intact. Sell decisions are also triggered if our risk control metrics exceed maximum weightings for a security or a sector, or if a higher conviction name reaches a valuation level that becomes more attractive. Given that the intrinsic value of a successfully growing company will continuously rise, AMI does not sell holdings when they reach a pre-determined price target or time horizon. We do not utilize stops and will add to positions of depreciated securities, provided the long term outlook remains intact.