Pillar Point Investment Process
Pillar Point’s equity investment process incorporates a valuation screening model to identify inefficiencies in how stocks are valued relative to company financial metrics and to other stocks, fundamental analysis to create a mosaic of companies and industries, and optimization that drives portfolio construction to generate incremental return while managing risk.
Underlying our securities analysis process is a 19 factor screening model that is applied to a capitalization appropriate universe of 250 to 450 companies. This model evaluates stock prices relative to company financial metrics and generates a valuation score for each stock in the universe. Since not all factors add value all the time, combining them into a portfolio of diversified factors makes the valuation model effective under different market conditions and contributes to more consistent excess return.
We use the same factors, but with different weights, across the different equity products. For example, since we believe that small cap investors purchase the perception of future growth, the factors for the small cap growth model are weighted toward earnings growth considerations, with an emphasis on analyst estimate revisions and earnings surprise. In contrast, the large cap growth model factors are more evenly balanced between growth and valuation, as the market for large cap stocks is relatively efficient at processing information. The momentum factors often foreshadow estimate revisions.
|Screening Model Factor Weights||Small Cap Growth||Mid Cap Growth||Large Cap Growth|
|Growth / Earnings||60%||50%||40%|
|Value / Price||30%||40%||50%|
Equally important is fundamental analysis, which provides insight into the relevance and accuracy of the factor data in the screening model. Research is conducted by the portfolio managers in both offices and shared daily by phone and email, and in a monthly 2-day research meeting. Our approach is to build a mosaic of information evaluating such attributes as company products and markets, competitive position and business drivers, risk factors, management track record and industry trends. We assess how the macroeconomic environment will influence a company’s prospects.
The combination of the screening model and fundamental analysis identifies attractive companies we wish to add to a portfolio, validates the reasons for holding those stocks we do, and identifies stocks that we should remove from the portfolio.
Portfolio Construction and Risk Management
We incorporate the results of our securities analysis in an optimization process to construct portfolios. We have a strong preference for holding the most attractively valued securities (to generate incremental return), offset by a moderate preference for conforming to the benchmark structural characteristics (to manage risk).
Diversification is another element of risk management. We diversify the factors in our valuation model; we diversify the portfolio across economic sectors; and we limit stock-specific risk by holding 80 to 110 positions. Risk control is further enhanced by repeating the structured analytical process regularly to ensure that timely information is reflected in the valuation ranking and fundamental analysis, and that the portfolios remain well diversified with the desired risk characteristics.
We will purchase a stock when the screening model and fundamental judgment indicates that it is attractive, or when it will contribute to portfolio diversification and risk reduction (even if other stocks appear more attractive). We sell or reduce a holding when stock or sector weights become overly concentrated, when the valuation ranking or fundamental judgment indicates that the stock has become less attractive, or to raise funds to buy more attractively valued stocks.
The long-term orientation and high conviction implicit in our investment process translates into low portfolio turnover.