Motley Fool Great America Fund seeks to achieve long-term capital appreciation by investing in what the fund managers believe to be superior businesses at reasonable prices within the United States. The portfolio managers apply a bottom-up qualitative investment approach to identify compelling small-and-mid-cap companies. It is a long-term, business-focused strategy with the aim of minimizing portfolio turnover and maximizing tax efficiency.
The management team searches for domestic companies with easily understandable business models, good corporate governance, and clear and reliable disclosures The fund’s managers may invest in any company, industry or sector if their fundamental analysis reveals a potential opportunity for outsized risk-adjusted return in alignment with this investment approach. The team does not engage in market timing.
Scouring the domestic universe of small-and-mid-cap publicly-traded stocks, the fund seeks long-term capital appreciation through investment in outstanding businesses at attractive valuations. The investment process involves:
- A "business-centric" view – the team is not driven by macroeconomic forecasts, sector forecasts nor technical analysis, but rather is simply interested in the companies themselves – their competitive advantages, their moats, their focus on customers, their competitors, and their products
- The team members utilize an active share mentality, which means they seek value wherever it lies without consideration of the construction of the fund’s benchmark allocations
- The team takes the time to know the fundamentals of a company and sticks to those with understandable business models whose risks are easily identified and quantified; the team does not invest in any IPO’s
- Straightforward discounted cash flow models are used to determine the intrinsic value of each identified stock along with comprehensive scenario analysis
- All stocks are rated on a quality continuum (see details below)
- The team purchases with the intention that each stock will be a permanent component of the portfolio to maximize tax efficiency
- The team engages in collaborative position reviews to ensure that investment theses are intact and share prices remain attractive. Stocks are sold when business quality deteriorates or more attractive opportunities arise. As part of our assessment to sell shares, we consider industry developments including technological advances, intensifying competition, and regulatory changes.
A Word about Risk
As business-centric investors, the portfolio team defines risk not as a function of share price volatility, but rather as the potential for permanent loss of capital from the erosion of a company’s competitive advantage. We do not place much emphasis on the volatility of a stock as long as the factors supporting the investment thesis remain intact. .The team believes that volatility can make shares of high quality businesses trade at attractive prices.. The team is not concerned about divergences in performance of holdings from the benchmark, the team embraces benchmark deviation as a way to maximize returns. The team conducts on-site research and devotes a great deal of resources focusing on “what can go wrong” with any company.
Investments in securities of small-cap companies involve greater risks than do investments in larger, more established companies, because they may lack the management experience, financial resources, product diversification and competitive strength of larger companies.
Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If the Adviser’s assessment of a company’s value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Great America Fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time.
The Great America Fund prefers to invest in high-quality businesses when possible. To identify these high-quality businesses, the portfolio managers evaluate the quality of a company using four criteria: management, the economics of the business, competitive advantage, and the durability of the competitive advantage period.
The portfolio managers believe that high-quality, motivated managers are a key element to long-term success at many businesses. In short, it takes a very special kind of business to survive poor management. Our process reviews managers on a multi-faceted basis focusing on tenure, capital allocation, and alignment of incentives with shareholders.
Economics of the Business
The portfolio managers believe that there is little more important than the economic performance of the business as a signal for quality. Our process looks at the company’s long-term return on capital, business model, relative and absolute margins, and other key performance indicators to gain insight into its potential for future performance.
We seek companies that offer certain characteristics that allow them to generate outsized returns on capital on an absolute basis as well as in comparison to their peers. Competitive advantages include pricing power, geographic barriers to entry, regulatory barriers to entry, and superior branding among others.
Companies often display superior economics over the short term due to favorable product cycles, customer preference, temporary structural or tactical advantages or other components. Our desire is to own companies in the Funds that can be kept in the portfolios for many years. Accordingly, a core part of our research process is to consider what a company might look like over a period of ten or more years. Our evaluation considers whether a company seems likely to grow, to increase profitability through additional products or other offerings, and if it has optionality that may make it a larger, stronger business in the future than it might be today.