Home / Investment Strategies / Long-Short Equity

Long-Short Equity

Investment Objective

The Long-Short Equity Strategy seeks to provide equity-like returns with substantially reduced volatility while emphasizing capital protection.

Universe

The long portion of the Long-Short Equity Portfolio’s universe targets securities with market capitalizations greater than $750 million.

The short portion of the Long-Short Equity Portfolio’s universe targets securities with market capitalizations greater than $500 million.

Investment Process

The Long-Short Equity Strategy investment process proceeds through four stages:

I. Idea Generation

River Road employs two research methodologies – Systematic and Dynamic.

Systematic Research: Screening of the firm’s two principal databases — Value Line and FactSet.

  • Qualitative screening with Value Line: Provides a snapshot of a business and up to 15 years of relevant quantitative historical trends
  • Quantitative screening through FactSet: Identifies stocks that best exhibit the Strategy’s critical criteria

Dynamic Research: An active search for attractive candidates among:

  • SEC filings (10-K/Qs, 8-Ks, proxy statements, insider trading, share repurchases/dividend increases, etc.)
  • Industry news and research
  • Competitor analysis
  • Our Watch List (including former portfolio holdings)
  • Various other contacts and resources established by the Portfolio’s management team

II. Security Analysis

LONG PORTFOLIO

The five critical criteria for long holdings include:

  • Priced at a discount to value: Target discount ≥ 25% of a company’s valuation
  • Attractive business model: Sustainable, predictable, understandable
  • Shareholder-oriented management: Insider ownership, accretive transactions, debt reduction, dividend initiations/raises
  • Financial strength: Free cash flow, attractive balance sheet
  • Undiscovered or underfollowed by Wall Street or misunderstood by investors

SHORT PORTFOLIO

The five critical criteria for short holdings include:

  • Challenged business model: Low returns on invested capital, companies in secular decline, companies that cannot grow their top line, companies that rarely generate free cash flow
  • Financial weakness: Unsustainable capital structures, excessive debt, negative free cash flow
  • Poor shareholder orientation: Overly generous compensation plans, significant related party transactions, insider selling
  • Priced at a premium to value: Target price ≥ 120% of a company’s valuation
  • Low price and earnings momentum: Avoid stocks with strong positive momentum

III. Portfolio Construction

The long portfolio targets 20 to 40 positions representing 50% to 100% of the portfolio value, with the actual number of positions dependent upon market conditions.

The short portfolio targets 20 to 40 positions representing -10% to -90% of the portfolio value, with the actual number of positions dependent upon market conditions.

Expected net market exposure is between 50% and 70% in normal market conditions.  In extreme market conditions, net market exposure may range from 10% to 90%.

IV. Sell / Cover Discipline

We believe that the key difference between a losing strategy and a winning strategy is that losers make big mistakes and winners make small mistakes.

  • Our sell and cover disciplines help keep the inevitable individual mistakes from causing large, permanent losses of capital in the broader portfolio.
  • We do not average down on losing positions.

 

Long-Short Equity Strategy Inception Date: July 1, 2010