New investment candidates for the Strategies are mainly generated through River Road’s proprietary screening and watch list. The proprietary screen is designed to identify high quality companies with improving fundamentals. Rather than simply looking for companies with absolute high but static profit margin or returns on capital, the screen identifies companies showing improving fundamentals, which we define as increasing sales, expanding operating profit margin, and improving returns on capital.

River Road builds portfolios in house, from the bottom up, making security-specific research central to our process. At the core of River Road’s Absolute Value^® approach is a systematic method for assessing the ‘risk-to-reward’ characteristics of an investment. The goal of the research process is to formulate two outputs from which an investment decision is made – conviction rating (risk) and discount to value (reward). These two factors along with the breadth of opportunity in the investment universe not only determine whether the stock qualifies for investment, but also guide how the stock should be sized within a portfolio.

Conviction Rating

The conviction assessment ranks each of the critical criteria, listed below, on a scale of 1 (highest/best) to 5 (lowest/worst), which are then aggregated into an overall conviction rating.

• Attractive business model: Understandable, predictable, and sustainable; high returns on invested capital; and reasonable growth prospects
• Fundamental improvement: Increasing sales; expanding operating profit margin; and improving returns on capital
• Valuation: Confidence in forecast assumptions
• Financial strength: Liquidity and leverage; hidden assets; and free cash flow yield
• Shareholder orientation: Significant insider ownership/insider buying; opportunistic stock buybacks; accretive transactions; and debt reduction
• Environmental, social, and governance (ESG): Practices; policies; and disclosure

Discount to Value

A stock’s discount to its assessed valuation is a proprietary measure that represents the expected upside or available reward within the valuation time horizon of a stock based on our fundamental approach to security valuation. A company’s market price must be 90% or less of our valuation to qualify for investment, with a preference for 85% or less.

The Portfolios target 35 to 45 holdings. (The target number of portfolio holdings is a working guideline. The actual number may vary depending on market conditions and other factors.)

The Strategies employs a proprietary sizing model which considers the security’s discount to value, overall conviction, and breadth of opportunity in the Portfolios’ investment universe.

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 discipline is designed to help keep the inevitable individual mistakes from causing large, permanent loss of capital in the broader portfolio.
• We do not average down on losing positions.