The Long-Short Equity Strategy seeks to provide equity-like returns with substantially reduced volatility while emphasizing capital protection.
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.
The Long-Short Equity Strategy investment process proceeds through four stages:
I. Idea Generation
The Long-Short Equity Portfolio’s management team begins by selecting from over 200 stocks in other River Road Portfolios, leveraging the work done by the firm’s investment team.
The portfolio management team also originates new investment ideas using River Road’s 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
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
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