Investment Philosophy

We are value investors. Our investment philosophy is rooted in the security valuation principles of Benjamin Graham and David Dodd. Through careful research and fundamental analysis, we seek to identify companies that are trading at a discount to their intrinsic value. We have determined that owning a diversified portfolio of value-creating companies acquired at attractive prices with a margin of safety has a high likelihood of investment success in the long run.

Our investment philosophy is built on three guiding principles:

  • Diligence - We must conduct the research necessary to discover quality companies led by strong managements in growing industries.
  • Discipline - We must maintain the discipline required to buy companies only at attractive valuations and sell those companies when they become overvalued.
  • Patience - We must have the patience required to maintain our discipline when markets go through cycles of being overvalued, recognizing that our approach will reward our shareholders through full market cycles.

It has been our observation that most investment managers conduct due diligence and research and many managers claim to have discipline. In our opinion however, very few managers have the patience to actually stick with their investment philosophy. At Queens Road, we are patient; our philosophy and underlying portfolio management process do not change with changing market conditions. We think this is critical to our success.

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4-Step Process

Our process is based on the methods of security valuation described by Benjamin Graham and David Dodd in Security Analysis. Using fundamental analysis, we look for companies that we can purchase with a margin of safety, meaning that, while their stock price is temporarily down, the company’s fundamentals in the long run remain sound.

"Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed." – Benjamin Graham

The Queens Road Funds are managed using a disciplined four-step process to identify those companies with the greatest likelihood to maximize after-tax returns while limiting volatility. We begin this process as follows:

  1. Balance Sheet - We look for companies with strong balance sheets, manageable debt, and strong free cash flow.
  2. Valuation - We attempt to normalize economic earnings over full market cycles using a classic Graham and Dodd methodology.
  3. Management - We look at management's long-term track record and their ability to layout a strategy and execute to achieve their objectives.
  4. Sector and Industry - We want to own companies in growing industries with favorable economics.

Generally, these are the steps we follow, though all investment decisions are made at the discretion of the Portfolio Manager, in accordance with the then current Prospectus.

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Risk Management

We view risk in the context of both return volatility and permanent loss of capital. By measuring risk levels and risk-adjusted performance we are able to determine portfolio efficiency. To monitor this, several portfolio risk statistics are analyzed.

Key Portfolio Risk Statistics

  • Alpha
  • Beta
  • Sharpe Ratio
  • Sortino Ratio
  • Up-Market Capture/Down-Market Capture

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Portfolio Management

Portfolios are assembled to maximize the benefits of diversification while maintaining the potential for return enhancement through security selection and sector allocations.

Portfolio Characteristics

  • No single security more than 5% of portfolio at purchase
  • Typically between 50-60 holdings
  • Broad diversification by economic sector
  • Diversified holdings of securities in the portfolio to assure industry diversification within sectors
  • Focus on risk-adjusted returns over a full market cycle
  • Low turnover

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Sell Discipline

We adhere to a buy and hold philosophy. Careful security selection allows us to maintain long holding periods reducing trading and execution costs. However, several catalysts may trigger a sale.

Sell Discipline Indicators

  • Significant deterioration in fundamentals
  • Loss of confidence in management
  • Stocks no longer in our target universe
  • Valuation no longer attractive

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Performance Expectations

The portfolios are designed with an emphasis on controlling downside risk. Understanding the implications of this emphasis is important for investors in the portfolio. Generally speaking, we expect to perform alongside, ahead or behind our peers in different types of markets.

  • Market advancing, but risk is prevalent - We hope the fund will provide above average to average performance compared with appropriate benchmarks. *
  • Market declining - We hope the fund will protect capital and outperform peer category and indices. *
  • Market advancing on speculation/momentum and risk is ignored - The fund will likely trail peers and benchmark indices. *
  • Over a full market cycle - We hope to obtain greater returns than the relevant benchmark while assuming less risk. *

* Although the fund has consistently been shown to perform as described above since inception in 2002, there is no assurance that we will continue to achieve this objective.

“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.” –Benjamin Graham

There is no guarantee that these performance expectations will be achieved. Past performance is no guarantee of future results. All investment decisions are made at the discretion of the Portfolio Manager, in accordance with the Prospectus. Please request a Prospectus which contains information about the investment objectives, risks, charges, and expenses of the Queens Road Funds, which you should read and consider before investing.

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Alpha:
Alpha measures risk-adjusted return, or the actual return an equity security provides in relation to the return you would expect based on its beta.

Beta:
A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole.

Sharpe Ratio:
A ratio developed by Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

Sortino Ratio:
A variation of the Sharpe ratio that differentiates harmful volatility from volatility in general by using a value for downside deviation. The Sortino Ratio is the excess return over the risk-free rate divided by the downside semi-variance, and so it measures the return to "bad" volatility.

Up-Market Capture
A statistical measure of an investment manager's overall performance in up-markets. The up-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen.

Down-Market Capture
A statistical measure of an investment manager's overall performance in down-markets. The down-market capture ratio is used to evaluate how well or poorly an investment manager performed relative to an index during periods when that index has dropped.