Thoughtful Analysis. Sound Discipline. Managed Risk.
SKBA's investment process has been in place since the founding of the firm. Our process integrates fundamental bottom-up research with our economic perspectives. Each step of our investment process, from idea generation to risk management, is designed to deliver attractive investment results while minimizing the risk of permanent loss of capital.
Universe and Idea Generation
SKBA begins with a universe of equity securities traded on major U.S. exchanges with a market capitalization generally greater than $2 billion. Investment ideas come from diverse areas, with the largest source being generated internally. SKBA's initial valuation metrics do not simply focus on "reported" earnings but instead on factors that are indicative of a company's underlying earning power and cash flows, as represented by its dividend policies, revenue stream and expected margins. Ideas are evaluated on their individual merits as well as in context of the desired portfolio characteristics. This value-driven approach involves finding opportunities where one believes that the market has underestimated the future cash flows of a company.
Security Selection and Analysis
In conducting security selection and equity analysis, SKBA focuses on investment risk, not simply market risk. SKBA formulates an investment hypothesis by understanding the capital allocation process of a company, its future opportunities, and competitive positioning. Furthermore, SKBA analyzes financial statements and conducts industry analysis to better understand the long-term structural changes that a company faces. Company research drives performance through value-added stock selection. We develop our own financial models, dividend probability analyses and expected value assumptions for each company we purchase.
Portfolio Construction and Risk Management
Portfolio construction is based on establishing a diversified portfolio and maintaining certain portfolio characteristics. Our objective is to construct a portfolio of 40-60 stocks diversified by sector to control for company-specific risk. Our bottom up approach to stock selection highlights industries and sectors with the most attractive valuations. Each existing or prospective holding is covered by a primary analyst and investment decisions are made by consensus among the portfolio managers. Security weights are determined on a combination of relative undervaluation to the other securities in the portfolio as well as establishing a diversified portfolio with desired characteristics. We continuously integrate risk management which is achieved through diversifying across economic sectors, purchasing securities below their expected values and monitoring hypotheses.