To provide superior risk-adjusted returns and consistently outperform the Russell 2500 Value Index over a full market cycle. We accomplish this by creating portfolios of companies we expect to exceed "street" expectations and that trade at discounts to our in-house calculations of fair value.
Transamerica Investment Management, LLC ("TIM") Small/Mid Value Equities can be categorized as a fundamental and research driven approach to investing in small to mid capitalization value stocks with market caps between $300 million and $5.0 billion. While portfolio fundamentals consistently reflect a value style, the portfolio is managed under the philosophy that growth and value stocks are not mutually exclusive. We seek to generate consistent, long-term performance by investing in businesses that have attractive valuations with growth potential and operating/competitive characteristics that provide downside protection. As a result, overall portfolio characteristics are targeted to possess above-average prospects for growth and below-average valuations relative to the Russell 2500 Value Index.
We believe that value can be added when we identify at an early stage positive changes affecting a company that the market has yet to discern. This groundswell of change may be the result of unanticipated secular changes at the macroeconomic level, or it may be positive fundamental changes occurring within a company.
The research team reviews indicators and events occurring at the global, national, and sector level. We then synthesize our conclusions into an outlook on the economy, including growth rates, monetary policy, inflation and corporate profitability. Our goal is to add value by forecasting changes in company fundamentals that the market does not anticipate. Furthermore, we focus on identifying businesses that are inefficiently priced because the market misunderstands their history and/or potential.
Our team-oriented research process emphasizes in-house research and seeks to control or limit non-systematic or business risk. In addition to a dedicated and highly experienced equity research team, our portfolio managers (who are analysts as well) also have the benefit of a large group of credit analysts as a resource.
The generation of "new ideas" starts with an eclectic group of sources including: securities industry contacts, trade shows, industry conferences, trade and general media, quantitative screens and, on a limited basis, Wall Street research. After this initial review, promising "ideas" are presented to the entire management team to determine which concepts merit further investigation.
To verify or discredit the conclusions of internal quantitative research, the portfolio managers review industry conditions, the company's market position, and quality of management. Personal interviews (with management, suppliers, customers and/or competitors), industry conferences, securities industry contacts and general news and trade media all play a role in this analysis.
In management's view, the market (and most Wall Street research) prices stocks based on measures of current profitability. As a result, market prices can underestimate a company's ability to generate profits or earnings in the future as well as its long-term growth rate. Our research seeks companies where reported earnings are likely to exceed consensus estimates and P/E expansion is anticipated. We refer to these as double delta opportunities. To uncover these discrepancies our research process looks closely for attractive characteristics including companies with untapped balance sheets, hidden assets, turnaround potential, M&A synergies, new product cycles, or cyclical opportunities.
TIM uses a proprietary valuation process to derive in-house earnings estimates for investment candidates. Return on Equity (ROE) decomposition is a key analytical tool. The research team focuses on the three primary components of corporate profitability: profit margins, asset turnover and financial leverage. Analysts then forecast trends and levels in the ROE drivers to develop in-house earnings estimates. The goal is to anticipate changes in company fundamentals before they impact earnings. This process involves a thorough understanding of a company's business model, the industry in which it competes and the macroeconomic environment as well as extensive balance sheet, income statement and cash flow analysis. Our overall portfolio characteristics have consistently demonstrated a lower price/earnings ratio than the Russell 2500 Value with a significantly higher earnings growth rate.
In meeting with management teams, the evaluation includes a determination of their vision, culture, incentive plans, strengths and weaknesses, the company's product lines, distribution capabilities and product pricing. Our goal is to invest in companies that have management teams which are experienced, prudent, and visionary, those that have a history of success and that act in the long-term best interest of shareholders Ð particularly through effective allocation of capital.
A standard research report format includes basic fundamental data, our proprietary valuation analysis along with a brief summary of the major reasons for purchasing a security as well as potential risks associated with the security.
Companies not eliminated from fundamental research are presented to the equity team for review. These group evaluations ensure that the reasoning and analysis behind each recommendation is solid and defensible and the securities ultimately selected truly fit all criteria and controls.
Each security is ranked for purchase, with priority given to those that have the greatest combination of the above-mentioned quantitative and qualitative attributes. All portfolios are well-diversified, and will generally consist of 40 to 60 securities (with an average holding representing 2-3% of the portfolio). A typical individual position size at purchase is 1.0% with an absolute maximum issue size of 8%. Economic sector exposure is generally limited to 30% and industry concentration to 20% of the total portfolio. All accounts are monitored on an on-going basis by the portfolio manager responsible. The number of portfolios assigned to a portfolio manager varies depending on the size of the portfolios. Client restrictions and guidelines are documented, and if possible, quantified on TIM's portfolio accounting and trading systems. Compliance with client guidelines is reviewed on a regular basis by the portfolio manager and Compliance Department.
The sell disciplines we use incorporate several factors, including: identification of a better idea (crowding-out), overvaluation relative to TIM-determined fair value and as compared with other like securities, a deterioration in company fundamentals, or if management is changing strategy in a questionable way or not meeting operating objectives. Securities may also be sold due to a shift in the team's macroeconomic outlook.
TIM's value equity team has an onsite trading desk staffed by three equity traders. Traders and portfolio managers work together to establish trading priorities at order entry and if necessary, during the execution process. Portfolio manager's review trade tickets at the end of the day and all trade tickets are reviewed the following morning by the investment team. TIM's Best Execution Oversight Committee monitors trade execution costs on a quarterly basis.
TIM's dedicated trading group has developed an extensive network of brokers, and due to our firm size and trading volume is able to leverage negotiations for best execution practices. Trading costs average $0.03 - $0.05 per share. We attempt to keep commissions as low as possible.
While the traders do their best to minimize market impact while executing orders, the ultimate decision on execution lies with the portfolio managers where opportunity costs may outweigh short-term market impact costs.
Our internal research is presented at our daily morning research meetings as well as monthly at our equity strategy meetings. Morning meetings tend to focus on brief updates of news items affecting our holdings while monthly meetings tend to cover more comprehensive reports such as buy or sell recommendations. Internal research is easily accessed by everyone through e-mail and voicemail. TIM's value equity team is located in our Dayton office. Their focused approach in conjunction with TIM's extensive peer review process enables our analysts and portfolio managers the flexibility to exchange information on a daily basis. Our collaborative approach to decision making provides our clients with a team oriented method to evaluating the merits of a security combined with the accountability of a lead portfolio manager's decision making skills.