Concentrated Large-Cap Value Equity

Investment Philosophy

Osprey's Concentrated Large-Cap Value Equity investment philosophy begins with the premise that superior returns over time can be achieved through investment in companies with low price/earnings ratios, strong financials, and significant operating cash flow. By employing a bottom-up approach with intensive research focused on company fundamentals, the Concentrated-Value Investment Committee is able to identify undervalued, financially strong, and well-managed companies.

Buy Decision: Osprey's buy decision process is designed to deal effectively with the two major risk factors that dominate in the management of all equity portfolios. They are market risk and business risk

Quantitative Analysis

Osprey minimizes market risk by focusing on undervalued, large capitalization companies with trading liquidity. By utilizing a bottom-up stock selection process which focuses only on those companies with a market capitalization greater than $1.5 billion and whose price/earnings ratios are at least 20% below that of the S&P 500, we can use the proven low p/e anomaly that exists in the market to combat the effects of market risk. When establishing new positions, we require enough trading liquidity in a stock so as not to be more than 30% of daily volume, and that it will generally not take more than 3 days to establish a full position of 4-6%.

The investment team then focuses on business risk. First, they perform balance sheet and income statement analysis to identify companies with the best value characteristics, including:

• Relatively low debt to capital
• Dividend yield greater than the market
• Earnings and margin stability
• Growing cash flow from operations
• Significant free cash flow
• Sustainable earnings and dividend growth

Quantitative Fundamental Analysis

Once the financial analysis is complete, the investment team then moves to a qualitative assessment of the company’s operations, future prospects and its senior management.  Discussions with management are a part of the decision making process.  During these discussions, the analysts focus on management’s use of free cash flow for dividend growth, capital investment, debt reduction and share repurchase.  The company’s past and current acquisition strategy, the market position of its products and its global competitive situation are also evaluated.  Discussions with competitors, customers and suppliers are often useful in determining a company’s position within its industry.

Finally, a review of management's compensation program is undertaken to determine the extent of management share ownership of the company and the amount of incentive compensation, in the form of additional share ownership, that is tied directly to company performance.

Sell Decision: The majority of stocks are sold when their price/earnings ratios reach a market multiple. For cyclical companies and others that rarely sell at market average p/e ratios, price targets are set based on specific company and industry analysis and the stocks are sold when the targets are reached. Appreciated positions that exceed 10% of portfolio value are scaled back. Holdings that experience a 20% price drop relative to the market or a change in fundamentals receive an immediate in-depth review by the sponsoring analyst and, independent of the analyst, by our research and analytics team. The goal of this intensive review process for underperforming ideas is to promote a well-rounded, challenging discussion of all the issues (company, industry and macro-economic) related to the specific idea, and to do so in a timely and urgent manner.

For Concentrated Value Equity portfolios Osprey maintains 25 holdings and remains well diversified across 10-15 industry groups.  Initial investment positions are 6% or less of the portfolio value at cost and industry exposure is limited to 25%.  Statistically, portfolios exhibit lower p/e, price/cash flow, and price/book value ratios than the Russell 1000 Value index, while maintaining an average or higher dividend yield and average or better earnings growth versus the index.