Aviso Large Cap Strategy
Philosophy & Background
In theory, the stock market as a pricing mechanism for equities has historically been very efficient. Hypothetically, everything known about a given company is already reflected in the valuation of its stock at any given time. Investors throughout the world have the ability to digest all available information on a company, including its expected earnings growth, historical earnings, book value, debt to equity ratio, price earnings ratio, etc., and immediately factor in this data when determining the current price of its stock.
If this is the case, then what causes stock prices to move up and down? Many suggest that corporate news, a published update from a research analyst, global events, economic trends or one of many other countless developments can cause stock prices to go up or down. In our opinion, however, the answer to what causes price movements remains simple: buying pressure and selling pressure. And it is the buying and selling by those with significant amounts of money – institutional investors such as mutual funds, hedge funds, pension plans and endowments – that can collectively determine the future direction of prices. While specific definable events can influence investor sentiment and, in turn, affect buying and selling pressure, ultimately it is the actual act of buying and selling that determines the current price of any given stock.
Many investors continue to rely heavily on the published research reports from analysts who are employed by the major investment banks and brokerage firms and include in their ranks many of the familiar names and faces in the media. In most instances, these analysts are considered to be sell-side analysts as their research reports are typically used by their sales force to generate transactions and commissions or trading fees and mark-ups.
In contrast, buy-side analysts basically conduct research used solely in making investment decisions for their own institutional accounts, and gauging the collective sentiment of the buy-side of the market is the foundation of our strategy. Buy-side analysts essentially vote with their monies by making an investment decision to buy or sell and are often compensated according to the accuracy and timeliness of their decisions. While any portfolio manager may make some poor decisions, we believe there is a strong case for examining what the buy-side of the market collectively owns, is buying, and is selling. In our opinion, careful analysis of their trading activity can reveal important information about the collective opinions of anticipated movements and long-term potential growth opportunities of certain stocks.
Our approach emphasizes those stocks currently being accumulated by institutional investment accounts and incorporates fundamental qualitative and quantitative disciplines to construct and manage each of our portfolios. We initially identify those stocks most widely held by institutional portfolios of $100 million or more. Utilizing technology to manage and analyze data from several sources, we monitor the current directional flow of block trades in these stocks (trades of 10,000 shares or more) to help identify which stocks are showing positive accumulation and negative accumulation. After eliminating stocks showing negative accumulation, our model portfolios are then constructed from the remaining universe with a focus on valuations, expected earnings growth rates, dividend yields as well as other proprietary indicators.
Generally, our typical Large Cap Strategy portfolio consists of a minimum of 20 stocks with initial individual stock exposure not in excess of 10% and initial sector weightings not in excess of 30%. We employ a strong sell discipline regarding any holding that shows negative accumulation or drops off of the list of most widely held stocks among institutional portfolios. Individual holdings will also be reduced in order to stay within our individual stock weighting or sector weighting as described above.
The firm’s Large Cap Strategy seeks long term growth of capital. We invest primarily in companies with a market capitalization greater than $10 billion. We may invest in a limited number of securities which may involve greater risk and more volatility than other strategies. Diversification itself does not guarantee a more beneficial outcome for the strategy. Portfolio values will fluctuate as market conditions change and may be worth more or less than the original purchase cost. Past performance is not a guarantee of future results.