Managers Jonathan Simon and Larry Playford have successfully employed their hybrid quality-and-value approach for many years. Both managers prefer steadier businesses with lower revenue cyclicality and earnings volatility. Their ideal stock has a healthy return on capital, reliable profitability, and a reasonable valuation. But they are willing to wade into stocks with greater uncertainty or operational headwinds as long as they feel strongly that the company has the financial strength to withstand a temporary rough patch. The managers pay close attention to position sizing to ensure higher-risk bets are smaller.
A stock’s enterprise value relative to its pretax earnings and its cash flow yield are some of the managers’ favorite metrics to assess a stock’s worth. The managers are long-term investors, often looking out three to five years ahead. They are typically inclined to ride their winners but are also keen to trim their gains to redeploy capital into cheaper stocks.
Historically, these parameters have produced a portfolio of relatively durable companies that has held up well in volatile market stretches such as 2008, 2011, and 2015 (all years when the benchmark produced a negative return). While performance stumbled in 2018's and 2020’s drawdowns as the managers misjudged the quality of certain holdings, it rebounded in 2021 and fared relatively better in 2022 thanks to better underwriting and portfolio positioning.
This strategy’s portfolio fits with its process. The core of the portfolio usually lands on the border of the value and blend sections of the Morningstar Style Box, reflective of the managers’ focus on the combination of growth, profitability, and valuation. The portfolio’s profitability metrics, such as average return on assets, are typically higher than the Russell Midcap Value Index. Such characteristics are often supported by a form of competitive advantage. Longtime holding AutoZone AZO receives a narrow Morningstar Economic Moat Rating thanks to its brand and cost advantages, while companies such as orthopedic-product maker Zimmer Biomet Holdings ZBH carry wide moat ratings.
The portfolio is well diversified across sectors and individual positions, usually holding 90–120 stocks, with 15%-20% of assets invested in the top 10 holdings. No stock can exceed a 5% weighting in the portfolio. However, the managers ensure there is sufficient differentiation from the Russell Midcap Value Index and aren’t afraid to be over- or underweight in particular sectors or industries. Mid-caps make up most of the portfolio, though they’ll make way for a smattering of small and large caps.