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Investors have diverse needs, objectives and risk tolerances. Horan Capital Management offers custom-tailored portfolios, including asset allocation, fixed income and equity only strategies that help to meet our clients’ goals. Regardless of approach however, the bedrock of all of the strategies we provide is a disciplined, time-tested, intrinsic value-conscious investment selection process.
Fundamental to this approach is that we look at each investment through the eyes of a business owner, evaluating opportunities individually based on long run potential. Our team looks at investment ideas from a bottoms-up perspective, paying particular attention to business quality, price and investment-specific risks. By paying strict attention to quality and price, we believe we can best serve to protect and grow client capital.
We believe that investment risk should be considered before reward, and that risk is best controlled by focus on quality and price paid. When assessing quality, we look for:
Financial strength, highlighted by conservative financing, readily ascertainable assets, and high cash flow relative to fixed costs.
Enduring, understandable business models, stemming from dominant brands, scale advantages, and exclusive patents and processes.
Shareholder-oriented management teams, that focus on transparency and value maximization via excellent return on capital or, when called for, return of capital.
Business growth, resulting from free cash flow generation and prudent, sensible, reinvestment by management.
To achieve growth in capital, we also pay particular attention to the price paid for investments. It is critical to remember that, quite literally, price paid defines an investor’s return potential. As part of our research process, we develop intrinsic value estimates based upon what we believe a private market business owner would pay for a company in entirety. Only when investments can be bought at a sizable, risk-adjusted discount do we then consider purchase. This approach is very similar to the one used by consultants that provide business valuation services to determine the true intrinsic value of a business.
Portfolio Construction
Portfolios are custom tailored and client-specific. Our various asset-allocated solutions may include international, small company, fixed income and mid and large domestic equity securities.
The mid and large stock component forms the core of most client portfolios. Within this piece of the portfolio, HCM concentrates on the best ideas to achieve capital growth. We believe wide diversification, as a risk control measure, potentially mitigates return because outperforming stocks tend to be held in very small weights. Running a more concentrated portfolio, on the other hand, allows us to focus research and attention squarely on our very best ideas and benefit meaningfully from price appreciation.
For clients drawing income, we offer customized, laddered fixed income solutions that meet individual liquidity requirements while also seeking to support growth objectives.
Client portfolios may, at times, hold sizable cash balances. Because we employ a bottom up approach to finding investments, the managers use cash as an investment vehicle rather than risk capital loss by holding richly valued securities. Similarly, new accounts may take a few months or more to get invested, depending on the prevailing market environment.
Idea Generation
The managers monitor and discuss current and prospective investments daily. The team’s portfolio managers serve as analysts and are responsible for idea generation. Investment ideas are uncovered via proprietary screens and maintenance of watchlists containing stocks we want to own but have not yet reached our purchase price targets.
Investment candidates are thoroughly researched using a team approach to evaluate business quality and intrinsic value. Findings are based on scouring and assessing a wide array of sources including: public SEC filings, trade and industry publications, news reports, site visits, and consultations with management, competitors and industry insiders.
Sell Discipline
For high quality, well-run, cash generating businesses, per share growth occurs through time through the basic accumulation of cash flows and investment. For this very reason, we are happy to own great businesses for as long as possible. Aside from benefiting from compounding capital appreciation, long holding periods serve to minimize friction costs such as transaction costs and tax liability. That said, sales transactions can result when:
:: Through appreciation, the investment becomes either grossly overvalued or overweight within the portfolio.
:: Another investment offers better risk-adjusted return potential.
:: We determine our initial fair value estimate was too high and the shares trade at unacceptable price to revised value ratio.
Investing Principles
We define risk as potential of losing capital, not volatility.
We think it is far more important and productive to worry beforehand about whether a business has staying power and value durability as opposed to worrying about its stock price volatility afterwards. By maintaining an independent, confident and unemotional view of a stock’s intrinsic value and being diligent about price paid, we believe we can best control the risk that matters most: permanent loss of capital.
Keeping it simple keeps us within our realm of confidence.
There are no points awarded for investment difficulty. An easy-to-understand business that has transparent and lasting value drivers can enable an investor to compound wealth over long periods of time, as much or more than that of a complex investment with a myriad of ever-changing, hard-to-predict variables. New issues or businesses going through rapid transition and venturing into unproven territories are generally not considered.
It pays to be contrarian.
Opportunities often arise when the herd is running in one direction and we are willing to run in another. We are happy and willing to own a stock that’s currently unpopular if problems are temporary and solvable.
Cash flow is king.
We prefer companies that are established and are likely to generate cash long into the future. To this end, we dig deep into financial statements to uncover the cash reality that can be concealed beneath accounting artistry. In our world, dividends, share repurchases and business re-investment don’t happen unless there’s cash available.
Benchmark risk takes a backseat to absolute returns.
Our goal is to grow capital on an absolute basis through an investment lifetime, while not exposing our clients to undue risk. We do not focus on one particular index when investing in individual stocks. Additionally, we will hold cash if there is a lack of attractive investment opportunities.
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