OVERVIEW FOR INSTITUTIONAL INVESTORS
TCM provides discretionary investment management services through separately managed accounts primarily to institutional accounts, including corporate pension and profit-sharing plans, Taft-Hartley plans, trusts, estates, charitable institutions, foundations, endowments, municipalities, corporations and registered mutual funds. Client accounts may be taxable or non-taxable. That investment discretion is exercised in a manner consistent with the stated investment objectives for the particular client account and, in many cases, is subject to specific written investment guidelines or restrictions designated by the client. The minimum account size for a separately managed account is $10 million, but TCM may waive this minimum in its discretion for a variety of reasons (e.g., when a new account is expected to grow rapidly in size, a relationship exists with a present client of TCM).
Small Cap Growth. The small cap growth strategy seeks to outperform the Russell 2000 Growth Index by investing primarily in stocks of companies with market capitalizations generally between $100 million and $2 billion at the time of initial purchase.
Small-Mid Cap Growth. The small-mid cap growth strategy seeks to outperform the Russell 2500 Growth Index by investing primarily in stocks of companies with market capitalizations generally between $500 million and $10 billion at the time of initial purchase.
We believe that stock prices follow earnings over the long term and use fundamental research to identify companies with superior earnings growth potential and sustainable valuations. The investment process focuses on identifying stocks with a minimum of 20% revenue and earnings growth potential for at least the next two years, sustainable valuations, and a 20% upside to price target over a 12 month time horizon. Intensive bottom-up fundamental research drives stock selection, which we believe is most likely to generate excess returns. The investment process uses a team-oriented approach, where members of the team leverage the expertise of their colleagues in an environment that facilitates the exchange of ideas and insights.
There are four main steps to our investment process:
1. Idea Generation. The first step in the investment process is idea generation, and the entire team is involved in this step. Candidates are screened for specific growth characteristics regarding revenue and earnings, valuation, and expected price appreciation. Previously owned companies are a source of ideas that leverages prior experience and knowledge base. Conferences and meetings with company managements offer opportunities to monitor existing holdings and prospect for new ones. The investment team visits with company managements in our offices, at conferences, or at company locations. These visits are in addition to phone calls and conference calls with management teams. In addition, observation of trends in the environment focuses research into sectors or industries that are expected to experience superior relative growth. As a result of this process, the team identifies companies for further analysis.
2. Research and Analysis. Stock ideas undergo in-depth fundamental and valuation analysis. Seeking companies with the ability to grow revenues and earnings 20% annually, we examine growth of market, share trends, competition, and trends in margins and expenses. With a strong emphasis on the quality of earnings, we also evaluate trends in operating cash flow versus reported net income. While a company may pass our scrutiny in terms of potential earnings, it is only a candidate for our portfolio if we believe it has a sustainable valuation. To reach that determination, we review a variety of financial metrics including P/E, enterprise value/EBITDA, price to sales and cash flow return on investment. At this stage, the team develops confidence in price targets based on earnings and associated risks.
3. Portfolio Construction. With a list of high conviction names in place that the team believes offer strong risk/reward potential, the team constructs account portfolios based on client objectives and guidelines. General portfolio characteristics for our two strategies are:
|Small Cap||Small-Mid Cap|
|Initial position size||0.75% - 1.5%||1.0% - 1.75%|
|Total Positions||90 - 110||80 - 100|
4. Risk Management. The investment team is intent on seeking to maximize return while controlling risk. There is a daily review of the diversification and weighting limits discussed in the prior paragraph, as well as ongoing review of client guidelines and pre/post trade compliance checks. In addition, the team sells a stock when the security exceeds its price target, the original investment thesis is broken, or a better investment idea is generated. It is at this level that our sell discipline and our “non-emotional check on selling”, a proprietary 10-point quantitative system to identify problem stocks, forces a review of poor performers. See “Sell Discipline.”
The team sells a stock when the security exceeds its price target, the original investment thesis is broken, or a better investment idea is generated. The investment team meets weekly to review a 10 point quantitative analysis that identifies stocks in the portfolio to consider selling. The analysis looks at various price and fundamental-based factors, including earnings or revenue revisions, relative strength, price action relative to market, and the change in price compared to the stock’s 52-week high. This review is intended to reduce the impact of emotions on the sell or hold decision. Any stock that has at least 5 of the 10 negative factors is subjected to a comprehensive review to determine whether or not the stock continues to meet the original investment criteria. The challenge of the investment thesis continues for as long as the stock stays on the list. In addition, stocks that have met their price objective are sold out of the portfolio on market strength.
PRINCIPAL INVESTMENT RISKS
An investment in stocks entails certain risks. TCM cannot guarantee that it will achieve an account’s investment objective. Since the prices of securities that an account holds may fluctuate, the value of your account may also fluctuate and you could lose money. It is important that investors closely review and understand these risks before making an investment in a separately managed account.
Management risk means that the Advisor’s investment decisions might produce losses or cause an account to underperform when compared to other accounts with a similar investment goal. Because of management risk, there is no guarantee that an account will achieve its investment goal or perform favorably among comparable accounts.
General Market Risk
General market risk is the risk that the market value of a security may fluctuate, sometimes rapidly and unpredictably. These fluctuations may cause a security to be worth less than its original price or less than it was worth at an earlier time. General market risk may affect a single issuer, industry, sector of the economy or the market as a whole.
Since TCM purchases equity securities, they are subject to equity risk. This is the risk that stock prices will fall over short or extended periods of time. Although the stock market has historically outperformed other asset classes over the long term, the stock market tends to move in cycles. Individual stock prices may fluctuate drastically from day-to-day and may underperform other asset classes over an extended period of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These price movements may result from factors affecting individual companies, industries or the securities market as a whole.
Growth Stock Risk
Growth stocks are stocks of companies believed to have above-average potential for growth in revenue and earnings. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may not perform as well as value stocks or the stock market in general.
Technology Company Risk
TCM may at times invest a significant amount of its assets (more than 25%) in technology companies, representing various unrelated technology industries. Although technology companies are found among a broad range of industries, they often face unusually high price volatility and losses can be significant. Technology companies may be significantly affected by falling prices and profits and intense competition. In addition, the rate of technological change for technology companies is generally higher than for other companies, often requiring extensive and sustained investment in research and development, and exposing such companies to the risk of rapid product obsolescence. If a company does not perform as expected, the price of its stock could decline significantly. To the extent that an account makes investments in such companies, its share price is likely to be more volatile. The potential for wide variations in performance is based on the special risks described above that are common to technology companies.
Foreign Securities Risk
Foreign securities, including ADRs, are subject to special risks. Foreign markets can be extremely volatile. Fluctuations in currency exchange rates may impact the value of foreign securities without a change in the intrinsic value of those securities. In addition, foreign governments may impose withholding taxes that would reduce the amount of income and capital gains available to distribute to shareholders. Other risks include: less publicly available information about foreign companies; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls.
Small and Medium Size Company Risk
Investments in smaller and medium size companies may be speculative and volatile and involve greater risks than are customarily associated with larger companies. Many small to medium companies are more vulnerable than larger companies to adverse business or economic developments. Securities of these types of companies may have limited liquidity and their prices may be more volatile. They may have limited product lines, markets or financial resources. New and improved products or methods of development may have a substantial impact on the earnings and revenues of such companies. Any such positive or negative developments could have a corresponding positive or negative impact on the value of their shares. You should expect that shares of a TCM separately managed account will be more volatile than an account that invests exclusively in large-capitalization companies.