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Investment Process

Our investment process is rooted in the empirical evidence that the earning power of a business is the key determinant of the price performance of its underlying securities.  In assessing the absolute and relative merits of an investment our process can be classified into three distinct phases: Fundamental Research, Idea Generation, and Portfolio Construction. Determining the potential of an investment requires an understanding of the underlying risks it may hold individually and collectively.  So while risk determination is integral to each phase of our investment process, we also highlight risk management separately to emphasize our diligence to risk that is not company specific.

Fundamental Research

We begin with a global view of opportunities and risks.  Our professionals' extensive experience across industry sectors gives us an understanding of the economic value chain of business, industry, and geography.  We believe our deep experience performing fundamental research in each industry sector is a key component in identifying opportunities.

We determine the long-term earning power of each company we analyze, modeling the key drivers of a company to determine a base case earning power.  Key drivers of earnings tend to revolve around revenues, margins, and capital management.  We then conduct sensitivity analysis on the key drivers to better quantify an upside and downside to our base case scenario.

Our approach generally looks to identify dynamic change that is material to the operations of a business, often creating misunderstanding that results in the securities of a business being mispriced.  We then compare valuation to peers and historic levels to confirm asymmetric payoff profiles and test against alternative measures of value.

Idea Generation

Once the fundamental research has been thoroughly vetted, we evaluate the risk/reward profile of the various investment opportunities.  This requires identifying the key sources of differentiated earnings, whether secular, cyclical, or company specific.  This allows us to specifically focus on the key drivers of an investment thesis to ensure it remains valid.  We look at the absolute and relative merits of the opportunities uncovered by our fundamental research to determine our highest conviction ideas.

Our team structure and economic value chain analysis allow us to better track fundamental change than simple quantitative screens would, and ultimately leads to capturing efficient and consistent opportunities in a variety of different market environments.  Often, a new position is one in a company we have had significant experience with but where pricing or fundamentals have not allowed an investment opportunity to fully present itself.  Timely capture of such inefficiencies is often a key component to success and is only visible to a prepared mind.  We believe our combined decades of industry specific training and experience is a key determinant of successful execution on our investment principals.

We always look to deploy capital in the most efficient manner possible, which means that an investment idea is continuously tested for validity even once it has made it into our portfolio.  Idea generation is not just about uncovering a new investment thesis but also ensuring that existing positions, including those held for an extensive period of time, still pass the test of being the most productive portfolio holding in the current environment.

Portfolio Construction

Our portfolio is designed for long term absolute returns with lower volatility.  We adjust the overall risk exposure based on our assessment of the individual opportunities as well as the overall risk environment.  The portfolio is built on a security by security basis so as to most efficiently capture the asymmetric payoffs we have identified.  We consistently monitor our portfolio for sizeable, unintentional risk factors.  We find that performance is often determined not just in how a position is initiated, but in the discipline of how it is managed and when it is liquidated.  This discipline stems from our focus on risk management and vigilance in searching for optimal capital allocation.

Portfolio construction also involves putting on short positions for both positive return opportunities on a security deteriorating in price and/or the management of risk.  We characterize our short positions as valuation shorts, fundamental shorts, or market shorts.  

Valuation shorts are often expressed through paired trades between similar businesses with significant valuation discrepancy that tend to mean revert.  These have the added portfolio benefit of generally being less or entirely uncorrelated to the markets.

Fundamental shorts represent opportunities to take a directional position without the necessity to specifically pair it with a similar security.  These can be firms with accounting irregularities, excessive leverage or even legal liabilities that are not yet well understood by the consensus.

Market shorts are used primarily to manage the overall risk exposure of the portfolio and may include a basket of companies or the use of indices and related securities to such indices, such as options and ETFs.

Our flexibility to assess and control overall risk exposure and how to express such risk through fundamental research in both traditional and non-traditional sources of return is ultimately the determinant of our overall performance.

Risk Management

A core tenet of Convector Capital Management's investment philosophy is its view and management of risk.  We believe identifying an investment opportunity and efficiently capturing its returns cannot be achieved without understanding risk.  We study risk at the stock level, portfolio level, and firm level.

At the stock level, rigorous research uncovers asymmetrical return opportunities.  Our conviction in long-term earning power and liquidity determines position size.  The use of shorts or derivatives allows us to hedge risk and more efficiently capture returns.

At the portfolio level, we monitor positioning and active risk resulting from individual security selection.  We utilize quantitative tools to identify factor and style risks, and actively manage intended and unintended exposures.

At the firm level, we perform comprehensive portfolio reviews with the investment team and senior management.  We also monitor firm relations as a potential source of risk, including counter-party risk and regulatory risk.

Finally, and just as importantly, we understand that a disciplined process and sophisticated models are tools to enhance our judgment and common sense, not replace it.

Technology

Technology is a critical component and key differentiator for Convector's investment process.  Our proprietary technology platform, built in conjunction with Alpha Hat, enhances the capabilities of our analysts and portfolio manager.  Our technology solution applies powerful data science techniques to study data much more effectively than legacy systems used by most peers.  This thorough examination of data enables us to discover unique insights, and empirically test and understand relationships between factors in previously unachievable ways.  

In addition, we utilize our technology to automate the many manual workflows involved in analysis, thus enabling our analysts to focus on more value-added opportunities.  Over time, the incremental gains from automation are greatly additive to alpha generation potential and efficacy.