Special Global Equity Team

Bryant VanCronkhite: Our team's value proposition is about exploiting a very unique market inefficiency. We believe most market participants focus exclusively on the income statement. They use historical data to extrapolate a view of the future. We think the market prices that in very well, very efficiently, because so many people focus on that. Our team's value prop is around looking at a company's balance sheet and how that balance sheet can be used to change the future income statement relative to the historical one. As an example, what we're doing is looking at the company's current balance sheet or current capital structure and comparing to what we believe is the optimal capital structure at the end of our 3-to-5 year holding period. One of the most important elements we're trying to establish here is how much money can a company spend if they were to optimize that capital structure. Maybe it's $1 billion. Maybe it's $10 billion. We arrive at that number, then through our qualitative research, analyzing a company's competitive positioning, the caliber of their free cash flow, and by engaging the company, we begin to understand how they might choose to spend that money. For example, they might make acquisitions or they might vertically integrate to improve their cost structure. They might invest in organic growth through an R&D budget or a CapEx program. Or they might simply give that money back to the shareholders through a dividend policy or a stock buyback program. Each of these choices has a different impact on the future income statement and future free cash flow. We have found the market does a terrible job pricing in that potential, that optionality of a company's balance sheet. We want to understand not just what they could do, but how they might do that in the future and what it might mean for the future value for the company. Importantly, one of the things that we've come to appreciate that over the course of a market cycle, people who run these businesses that we own only have control over a small subset of the things that impact their stock price. For example, they can't control GDP, interest rates, inflation, deflation, etc. But what they can control how they spend their capital. If they do it well, they create value. They do it poorly, they'll destroy value. So, we focus very much around a company's balance sheet. Now, we add onto that our focus on free cash flow. Their value of business is based on the cash they're going to create. And we're going to obviously use the balance sheet to understand future free cash flow generation, but importantly, we use our CPA backgrounds to understand how today's income statement might not reflect the long-term full cash power of the business. And as we look into the future cash flow and we add to it the value of the balance sheet, we arrive at our valuation framework. That framework is about reward relative to risk. We think most investors spend way too much time focusing exclusively on the reward component of that. We want to make sure we're getting properly paid to take on a certain level of risk. Our upside, our reward, is driven by the cash flow and the balance sheet and our downside is based on what would happen to the stock price in a stressed economic environment. It's only when you can create that ratio of reward to risk do we really understand if we're getting paid to take on a certain level of risk. And we use that framework to understand not just what stocks to own, but how to size them in the portfolio, when to add to a position, when to trim from a position. This objective way of making decisions is designed to improve our consistency of delivering our outcomes. The markets are highly emotional and emotion is the enemy of being consistent. And so, having an objective way to make decisions helps create a consistent pattern of outcomes for our clients throughout the future. Those three things make up our value proposition: our unique view of the balance sheet and how it can be used to create future value, our analysis of a company's free cash flow, and importantly, making decisions around reward versus risk to deliver consistent outcomes for our clients.