Investment Objective: The primary investment objective of the Intrepid Income portfolio is high current income and capital appreciation.
Investment Philosophy >>
- We seek to protect our clients' capital while participating in periods of market appreciation.
- We are intensely focused on downside risk and will invest only when we believe we are being well compensated for the risk taken.
- 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 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 bonds of these businesses are suffering from issues that we determine to be temporary.
- The goal 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 Portfolio after strong market gains and has been a smaller percentage of assets following steep market declines.
Portfolio Construction >>
- We generally own 20 to 50 securities in the portfolio which typically includes approximately 10 to 40 high yield companies. Typically, our initial position size will be around 2% of Portfolio assets. We will add to holdings as we become more comfortable with the company or if the bond price declines without an equivalent decline in fundamentals, affording us an opportunity to purchase the bond at a more attractive yield.
- Our maximum position weight at purchase is 5%, and position size is dictated by the quality of the holding and the prospective yield offered.
- 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. In addition, we favor companies with significant tangible assets.
- 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.