Our investment philosophy is rooted in fundamental analysis informed by security-specific insights that are combined with economic and market insights. This approach takes advantage of inefficiencies that develop in publicly traded securities because pricing is often driven by macroeconomic/passive investments that have little regard for company specific realities, or stock-pickers that often eschew the economic and market environment. Our investment positions are therefore often differentiated and contrarian to that of the market. Disciplined portfolio construction combined with investment flexibility extracts these excess returns with consistency and efficacy, while minimizing downside exposure through active risk management. Every step of our investment process is empowered by a proprietary technology platform (C.A.R.L.) that enhances our ability to identify opportunities, reduce cognitive bias and empirically test hypotheses through a comprehensive study of data on over 7000 companies globally.
We begin with a global view of opportunities and risks. A differentiating aspect of our approach is that we consider macro-economic analysis an important aspect of fundamental research. We do this because we understand that exchange rates, fiscal, trade and monetary policy, capital access and regulation can have an important effect on the underlying earnings of a business. When combined with extensive experience analyzing companies from a more traditional bottoms-up approach our understanding of the economic value chain of business, industry, and geography is enhanced and 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 the outlook and valuation to peers and historic levels to confirm asymmetric payoff profiles and test against alternative measures of value.
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 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 rarely visible in traditional investment processes.
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.
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 dynamically 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.
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, actively manage the market cycle, and for 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, sophisticated models, and machine learning are tools to enhance judgment and common sense, not replace it.
Technology is a critical component that differentiates Convector's investment process. Our proprietary technology platform C.A.R.L. (Convector Advanced Research Laboratory) enhances the capabilities of our analysts and portfolio manager. The technology solution applies powerful data science techniques that converts data into information more effectively than systems used by peers. This thorough examination enables us to discover unique insights, empirically test and understand relationships in ways previously unachievable, and is a key determinant of successful execution on our investment principals.
In addition, we utilize our technology to automate the many manual workflows involved in analysis, thus enabling us to focus on more value-added opportunities. Over time, the incremental gains from automation and analytical efficiency are greatly additive to alpha generation potential.