These surviving 600 companies are evaluated on the basis of earnings quality and sustainability. Unlike the first screen which is purely quantitative, this screen contains some qualitative elements. The remaining 300 or so companies are evaluated on the basis of their own valuations. Typically, about 60 companies survive these screens on a weekly basis. Additionally, at this stage candidate companies are subjected to social and environmental screening, seeking to eliminate those companies whose corporate behavior could impede performance.
Risk management is an important part of our investment process.
The investment team seeks to control risk in three ways. As stock positions appreciate and grow in size, the team re-evaluates the stock and may either eliminate or trim the position. Second, the portfolio is analyzed for its overall level of diversification, with the objective of reducing residual risk. This discipline requires that the portfolio be reasonably diversified relative to the market, as defined by the R-squared of the portfolio. Third, after screening for growth companies, valuation techniques are applied which favor companies that are rapidly growing their earnings but are currently trading at prices which do not yet reflect their earnings growth potential.