We believe fundamental, bottom-up security selection focused on investing in undervalued stocks with more upside potential than downside risk, may provide the opportunity for attractive long-term risk-adjusted returns. A company’s stock can be undervalued for many reasons, including a disappointing earnings report, a restructuring, a lawsuit, management that failed to deliver results, or an adverse short-term cyclical trend. As value investors, we seek to profit from other investors’ tendency to overreact to this negative information, as they punish the shares of even those companies with long-term potential.
We utilize a global, unconstrained approach, which provides maximum flexibility to take advantage of the most attractive opportunities across the world. This unconstrained, benchmark-agnostic approach leads to high conviction portfolios that target high active share. A higher active share portfolio can in turn enhance the potential for generating meaningful excess returns. Through our valuation and investment discipline, we aim to generate attractive excess returns with lower volatility than the equity market.
Through fundamental, bottom-up security selection, we seek to identify undervalued stocks with more upside potential than downside risk, and to generate attractive excess returns with lower volatility than the equity market, over full market cycles. |
The PIMCO Pathfinder Strategy utilizes a time-tested deep value investment process, which has been used to manage the strategy since its inception. Since Charles and Anne joined PIMCO, the process has been further enhanced by access to the firm’s global investment resources, including its broad capabilities in cash and currency management, market risk hedging strategies, proprietary analytical tools, policy research and operational execution. Including Charles and Anne, the Pathfinder team comprises five highly experienced equity analysts.
Beginning with a global unconstrained universe, we search for potential opportunities across the world. To generate ideas we use a combination of valuation and price screens, together with fundamental research, including attending industry conferences, meeting with company management teams, and talking with industry experts.
Once an opportunity has been identified, we proceed with a thorough analysis of the company. This includes examining annual reports and company filings, analyzing corporate actions, speaking with the company’s customers, suppliers and competitors, and meeting with company management. Through this process we gather sufficient information to model the business and estimate its value.
We seek to invest in companies whose stock is trading at a 30% or greater discount to its intrinsic value. Additionally, securities must demonstrate a compelling ratio of upside potential relative to downside risk. We also have a bias towards quality companies that exhibit one or more of the following characteristics: solid earnings power and cash flow generation; sustainable business models and competitive advantages; and capable, steady, shareholder-friendly management. For various reasons these companies may be out of favor with investors, with assets or earnings power being overlooked by the market. In addition, we seek securities with an identifiable catalyst, such as a management change, business restructuring or new product launch, which may help unlock the company’s underlying value.
To estimate intrinsic value we use a variety of approaches. Earnings-based approaches focus on the cash flow or earnings power of the business and evaluate measures such as free cash flow yield, current earnings yield or normalized earnings power. Asset-based approaches evaluate balance sheet assets, adjusting the value of those assets to reflect current market values, and the asset’s earnings power. We may also use private market valuations, in which we estimate the price a private equity buyer might pay for the business as a whole or in part. Through looking at valuation through various perspectives we aim to gain a more thorough understanding of the business and a more accurate estimate of intrinsic value.
The portfolio is constructed using a “push” model of investment recommendation, in which analysts conduct their own research and then present ideas to the portfolio managers. This is consistent with having a team of highly experienced analysts, each developing investment ideas. The portfolio managers make the final investment decision, evaluating an idea based on both the strength of the investment thesis and fit within the portfolio. Positions are included in the portfolio based on research conviction, with securities with the most upside potential and least downside risk, being assigned the highest weights. Positions are then reduced as the price approaches intrinsic value, and exited entirely once the price reaches intrinsic value, or if the investment thesis is broken.
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