Motley Fool Independence Fund seeks to achieve long-term capital appreciation by investing in what the fund managers believe to be superior businesses at reasonable prices anywhere in the world. The management team primarily applies a bottom-up investment approach to identify high quality stocks selling below their intrinsic value. The team “follows the value” without restriction on sector, company, size or geography. The fund is weighted approximately 50% domestic and 50% international. It is a long-term, business-focused strategy with the aim of minimizing portfolio turnover and maximizing tax efficiency.
With its focus on absolute return, the management team looks for companies with easily understandable business models, good corporate governance, and clear and reliable disclosures. The investment team prefers companiesthat operate in markets where reliable regulatory frameworks exist. The team focuses on conservatively run companies that the market has irrationally undervalued and that possess catalysts to help the companies realize their full market value. The fund’s managers may invest in any company, market, 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 global universe of 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 IPOs
- 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 the awesomeness continuum (see below)
- The team seeks to capitalize on market pricing inefficiencies that can cause a company to be irrationally undervalued, and 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 an active sell discipline to ensure that less attractive stocks are sold when more attractive opportunities arise
In making investment determinations, the Fool Funds team also considers published information from The Motley Fool's newsletter services, and the Motley Fool community.
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 due to a loss of competitive advantage. We do not place much emphasis on the volatility of a stock, country or sector.The team believes that volatility is one of the key forces that create mispriced securities. The team is not concerned about divergences in performance of holdings from the benchmark, the team embraces benchmark deviation as a way to control risk and 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.
Investing in securities of foreign companies involves risks generally not associated with investments in securities of U.S. companies, including the risks of fluctuations in foreign currency exchange rates, unreliable and untimely information about the issuers, and political and economic instability.
Emerging market countries present risks in addition to and greater than those generally associated with developed foreign markets, such as lax government regulation and smaller, less liquid securities markets.
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 Independence 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.
One of the key elements of security analysis is the team’s evaluation of the durability of a company’s competitive advantage. We believe that one of the greatest factors in mispriced securities is the market’s under- or overconfidence in a company’s ability to generate supernormal returns on capital, margins and/or rates of growth for an extended period of time.
The Fool Funds team attempts to place a quantitative factor to identify its assessment of company quality. We believe that there is a bell-curve continuum of companies, with few exceptional companies in one tail, and low-quality companies in the other. The middle of the bell curve contains the majority of companies in existence.
The theory is that our returns will be enhanced by our ability to properly identify the quality of a company on this “awesomeness continuum.” It is our observation that many value-based fund managers miss out on exceptional companies that they can hold onto for years due to their adherence to statistical measures that do a relatively poor job of assessing franchise value and durability. In particular, we use the Awesomeness Continuum as a tool for determining how much flexibility we should have in determining when we would want to sell a security. A company with a lower Awesomeness Continuum rating likely would not be granted the same amount of valuation and performance latitude as would a more highly rated company.