“Discovery consists of seeing what everyone has seen but thinking what no one has thought”
Albert Szent-Gyorgyi Von Nagyrapolt Nobel Prize Winner of Medicine, 1937
The foundation of Hahn Capital Management's investment philosophy is that risk management is the key to superior long-term investment results. Our primary objective is to preserve capital by avoiding companies with a high risk profile. However, we understand that investing in equities carries some degree of risk. We manage and control risk in three ways:
* By identifying and investing only in high-quality companies, which we define as companies with superior balance sheets, sustainable competitive advantage, and seasoned management teams with demonstrable track records of success.
* By isolating and separating risk factors into either acceptable or unacceptable categories. We avoid investing in companies with risks that fall into the unacceptable category.
* By buying only our best ideas and knowing these companies better than the market. Our hurdle is high, so as a result, we own only 30-35 stocks in our client portfolios.
Our investment process is value-focused, fundamental and bottom-up in nature, and is designed to remove emotion from our portfolio management decisions. Our universe of mid-cap companies encompasses approximately 1,500 publicly traded companies traded on the U.S. stock exchanges with market capitalizations between $2 billion and $50 billion. We look for companies and/or industries where there is positive fundamental change taking place, but where this change has not yet been recognized by the broader investment community.
At the industry level, we focus on industries in transition, out-of-favor, or out-of-cycle sectors where we can identify an inflection point leading to improving supply/demand and pricing fundamentals or to consolidation within the industry. At the company level, the firm looks for changes that will lead to improving and more sustainable profitability, such as a change in the management, a restructuring of the business, or a new proprietary product or service.
While "positive change" is the pre-requisite element to identifying a potential investment candidate, there must also be a Value Creator. A Value Creator is the facilitator of change that transforms the company or industry into a more profitable entity.
Industry value creators may include 1) new legislation or regulations; 2) technological innovation; or, 3) an improving supply/demand structure. Company-specific value creators may include 1) a transforming acquisition; 2) the sale or divestiture of an underperforming business; or, 3) introduction of a new set of products, solutions or services.
The underlying rationale behind the search for Value Creators is to avoid value traps, defined as undervalued businesses with no path toward recognition of such value. The guiding principle behind our investment philosophy is to address the risk of an investment first, then the return potential. In this phase of our process, our goal is to identify and quantify, where possible, those risks that would be unacceptable and thus would preclude our purchase of a company, as well as those that are within acceptable levels.
We endeavor to apply consistently a research-driven investment process in an effort to separate unacceptable risks from acceptable uncertainties and to estimate intrinsic value of an enterprise. The process is fundamental and bottom-up in nature and aims to remove emotion from our portfolio management. The result is a proven track record of value-added decisions predicated on independent judgments and long-term time horizon.