Investment Objective: The primary investment objective of the Intrepid Balanced portfolio is long-term capital appreciation and high current income.
Investment Philosophy >>
- We seek to protect our clients’ capital on the downside while participating in periods of market appreciation.
- We are focused on downside risk and will invest only when strict valuation criteria are met.
- While much of the investment industry treats performance like a football game, measured in quarters, we view investing as a marathon of emotional discipline encompassing years of investment returns in favorable and unfavorable climates.
Investment Strategy >>
- We search for businesses that can be valued with a high degree of confidence, generate consistent free cash flow, have strong balance sheets, and are run by a proven management team with a solid record of capital allocation. Often, the stocks or bonds of these businesses are suffering from issues that we determine to be temporary.
- We often buy equity securities when they are trading around 10x the business's normalized free cash flow.
- On the fixed income side, the objective is to generate an attractive spread over comparable maturity US Treasury securities without incurring a significant risk of default. We aim to invest in securities of companies with low leverage ratios and a history of prudent capital allocation decisions. Generally, the bonds in the portfolio are of a small issue size, typically less than $500 million in total size.
- We employ a long-term investment outlook focused on absolute value.
- Our process is designed to capitalize on fear, volatility, and the inevitable investment bargains they generate.
- We are content to hold cash if we cannot identify enough undervalued opportunities to be fully invested. Cash has historically comprised a larger percentage of the Fund after strong market gains and has been a smaller percentage of assets following steep market declines.
Portfolio Construction >>
- We generally own equity securities of approximately 20 to 75 different companies in the portfolio, and will typically hold high yield securities of approximately 10 to 40 companies or approximately 20% to 60% of total assets held in such high yield securities. Typically, our initial position size will be around 2% of Portfolio assets. We will add to equity holdings as we become more comfortable with the company or if the share price declines without an equivalent decline in fundamentals, affording us an opportunity to purchase the name at a larger discount.
- Our maximum position weight at purchase is 5%, and position size is dictated by the discount to intrinsic value and the quality of the holding.
- Equity holdings are typically exited as their share price reaches intrinsic value. Fixed income securities are typically exited either at maturity, or when the yield becomes unwarranted by business fundamentals.
Risk Control >>
- Risk is controlled through two key mechanisms.
- First, our investment process includes elements specifically designed to assess the risk associated with each security, including an evaluation of a company’s operational and financial risk. We strive to avoid companies with both kinds of risk.
- Position size is the second element we employ to control risk, and we will limit position sizes based on the risk profile presented by a prospective investment.
- While we do not build positions based on sector/industry mandates, as we feel such requirements actually add risk to a portfolio, we do limit our exposure by not investing more than 6% in any one security. In conjunction with our valuation discipline, this limitation has historically limited our sector exposures and created a portfolio with an attractive risk-adjusted return profile.