Research

We begin with a global view of opportunities and risks.  A differentiating aspect of our approach is that we consider macro-economic analysis an integral 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 value of a business. This enhanced dynamic understanding of how exogenous factors continuously interact with the fundamental characteristics of a business is a key component in identifying opportunities.

Our approach identifies dynamic change that is material to the value of a business, often from misunderstood expectations that result in securities being mispriced.  Our algorithms train themselves to identify and compare these asymmetric payoff profiles and tests them against the market. Because the variable is identified, we can track the evolution of the investment thesis in real time.

Idea Generation

Once the research has been thoroughly vetted, we evaluate the risk/reward profile of the various investment opportunities.  The key source(s) of differentiation being identified 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 as they evolve to determine a dynamic portfolio from our highest conviction ideas.

Often, a new position is one in a company we have had significant experience with but where pricing has 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, meaning an investment idea is continuously tested for validity 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, pass the test of being the most productive portfolio holding in the ever-changing market.

Portfolio Construction

Our portfolio is designed for long term absolute returns with lower volatility.  Individual opportunities are continuously monitored against the overall risk environment.  The portfolio is built on a security by security basis so as to most efficiently capture the asymmetric payoffs identified.  We continuously monitor our portfolio for 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.  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 through specific catalysts is an important edge in our overall performance.

Risk Management

A core tenet of our investment philosophy is our ability to assess and manage risk.  We believe identifying an investment opportunity and 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 and liquidity determines position size.  The use of shorts or derivatives allows us to hedge risk and capture returns.

At the portfolio level, we monitor risk from individual security selection and position size with how they interact with the rest of the portfolio.  We utilize quantitative tools that 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

Technology is a critical component that differentiates Convector's investment process. Our award winning proprietary technology platform C.A.R.L. (Convector Algorithms Research Laboratory) enhances our long-proven investment management capabilities.  The technology solutions apply 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, minimize cognitive bias, and is a key determinant of successful execution on our investment principals. 

In addition, we utilize technology to automate the many manual workflows involved in analysis, further reducing human error and enabling us to focus our time on the value-added human cognitive abilities.  Over time, the incremental gains from automation and analytical efficiency are greatly additive to alpha generation potential and in many cases eliminate any human interaction.