Eachwin Capital’s unique approach developed from the capabilities and experience of its team. We built an investment process designed to identify the strongest boards and executive management teams among publicly traded companies, assess their investment merits, and construct equity portfolios to produce attractive long-term returns.
Excerpt from Eachwin Briefing Materials:
“We believe that an exceptional leadership team with an attractive business model can generate persistent, above average operating and financial performance, and that such performance will lead to excess investment returns over long periods. We also believe that exceptional leadership teams mitigate risk by anticipating changes in their environments, acting nimbly in response to challenges, and operating in a consistent and measured way across cycles. Often, they take advantage of weaker competitors, allowing themselves to emerge from a negative environment in a stronger position.
“Managers are the force within the firm that create, perceive and pursue opportunities, and therefore the force that drives differences in organizational performance.”—Wasserman, Nohria, & Anand, 2001
Our investment process is disciplined and repeatable. We select candidates for investment in each industry based on a careful examination of relevant operating metrics and many conversations with individuals who have had the opportunity to see a broad variety of executive teams in action. Once we determine that a candidate has merit and as our diligence proceeds, we deeply explore the characteristics of its management team, including its vision, organizational structure, decision-making processes, individual player capabilities, board of directors, financial discipline and overall effectiveness. The team in this context includes the company’s most senior executives as well as key divisional executives and individuals who lead staff functions critical to the company’s business.
There is no rigid or fixed formula for assessing managerial competence. It requires experience and judgment based on knowledge of an industry and the competitive landscape that a company faces; an understanding of the merits and risks associated with the company’s chosen strategy; and an analysis of the roles, skills and engagement of the individuals on the executive team and board of directors. Much of this information is not readily available. It must be ferreted out through deep research and extensive outreach to individuals who have had direct exposure to the individual leaders and the overall team. Our approach is to distill these observations in a repeatable framework that allows us to see patterns and gain insights which are not understood by other market participants.
“Managers differ with respect to their ability to manage resources, and these differences help explain why some firms create more value from their resources than others do… resources may provide a performance advantage, realizing this advantage depends on the way in which managers bundle, deploy, and synchronize resources.”—Holcomb, Holmes, & Connelly, 2009
As we deepen our understanding of a company, we assess in detail the current investment merits of its stock, including expectations for financial performance and valuation. We develop detailed projections based on typical company planning horizons, and supplement that analysis with longer-term DCF or other valuation methodologies where applicable. We study how the company is perceived in the market relative to peers and how it has been valued over time. We use a rigorous methodology to develop target and expected rates of return for each investment and use these methods to compare potential opportunities on an apples-to-apples basis.
Our investment process culminates in the creation of long-only equity portfolios designed to deliver long-term excess risk-adjusted returns. Our bottom-up approach drives stock selection, while a top-down overlay that considers macro factors and sector exposures influences portfolio construction. The portfolio is liquid, unlevered and subject to clear-cut risk controls.
“Among high Active Share portfolios – whose holdings differ substantially from their benchmark – only those with patient investment strategies… on average outperform, over 2% per year. Our results suggest that U.S. equity markets provide opportunities for longer-term active managers, perhaps because of the limited arbitrage capital devoted to patient and active investment strategies.”—Cremers and Pareek, 2015
We take a long-term perspective because we believe that building value requires patience and consistent investment. Our typical investment horizon is designed to be long enough for management’s currently identified strategic and tactical initiatives to begin to unfold and be reflected in its stock price. And we find that the best management teams continually refresh their strategies and initiatives, and surface opportunities which go beyond what we or others are able to anticipate. These are the situations where our perception of value grows faster than the stock price, allowing us to hold the position for a very long time. We are willing to hold stocks through volatile periods as long as we are confident that a company is demonstrating the characteristics that we believe make it both exceptionally well-managed, and well-suited to operate in the environment it is likely to experience over the long run. On the other hand, we believe that changes in management or management effectiveness are “canaries in the coal mine” regarding future financial and stock price performance. The departure of talented executives is often the first sign that the potential upside in a company’s operations are waning or that its competitive position has been weakened, so when we see deterioration in the quality of the executive team or evidence that contradicts our thesis about management’s capabilities, we are quick to move on.
We have never attempted to take any active role in the companies whose securities we own. Nor are we short sellers. Rather, we are highly focused on identifying an investable universe of best-in-class management teams who possess the skills and acumen to outperform their competitors.
Our own commercial approach is grounded in a strong focus on client solutions. The name Eachwin Capital reflects our core value of working with others in a way that leads to mutual benefit.”