Long-term capital appreciation that is meaningfully superior to the performance of the S&P 500 index.
Our philosophy is simple and straightforward and will always remain so. We select stocks of good businesses that are priced at a discount to our assessment of their value. Although stock prices may be irrational in the short term, they generally will return to a fair valuation within a period of no more than two or three years. With a portfolio of such stocks the waiting period is generally much shorter. Once the market realizes fair value for the stock we will sell it, and our hunt resumes for undervalued stocks to replace the one’s sold.
Investment Research and Process
Liberty Hill Capital will seek to achieve the investment objective by investing under normal circumstances in equity, equity-related securities, and fixed-income securities (i.e. bonds). We seek to capitalize on market inefficiencies by employing a systematic bottom-up approach based on proprietary metrics used to identify companies that are high return on capital businesses that appear to be undervalued on both an absolute and relative basis.
Criteria to Identify good businesses as determined by Liberty Hill Capital:
- High return on capital. A must.
- High return on equity. A must.
- Businesses we can understand. A must.
- Durable niche in their marketplace. A must.
- Stable to rising revenues and earnings over previous 10 years. Preferred.
- Shareholder friendly management. Preferred.
The Adviser will research and analyze each company in his coverage universe, approximately 3,500 U.S. stocks, according to the criteria above, emphasizing fundamentals such as recurring earnings, capital efficiency and valuation. Those not meeting the criteria or companies with questionable financial reporting as determined by the Adviser will be excluded from further consideration of inclusion into the portfolio. From those meeting the criteria, typically 100 – 150 stocks, further analysis will be done on the quarterly (10-Q) and annual (10-K) SEC filings, earnings releases and other corporate filings and 10 – 20 undervalued securities will be selected for inclusion into the portfolio. The Adviser believes he can understand 10 – 20 securities well, holding many more issues than 20 securities will hinder the performance which will hinder the ability to meet the stated investment objective and goal. The holdings will be monitored for fundamental developments, that may affect future performance, and for price developments, reflecting whether or not the holding has reached fair value. Once the holding reaches fair value, as determined by the Adviser, the holding will be sold, and the process will be repeated to find a replacement undervalued security.
From time to time we may invest in special situations that do not fit with the above criteria, but for other reasons are determined attractive investments, these will never make up a substantial portion of the portfolio.
Investors often are concerned about diversification to reduce nonmarket risk, the risk that one or two unfortunate stock picks negatively affect your portfolio. There are a couple of points to consider regarding diversification, first, when investing in a typical stock mutual fund they are investing billions of dollars and have no choice but to invest in hundreds of securities to invest the massive amounts of money, secondly over 81% of nonmarket risk is eliminated by owning 8 stocks and 93% is eliminated by owning 16 stocks. After purchasing 8 stocks the benefits of adding more stocks to decrease risk is small.* By including more stocks in our portfolio than we do, we would be taking resources away from our best picks to invest in less favorite picks and move our performance closer to the average. This is the reason that mutual funds as a whole underperform the indexes they compare their selves to.
We appreciate your interest in Liberty Hill Capital. We hope this summary of our investment objective, philosophy and process have proved helpful in your understanding of our firm. Our pledge to our clients; we will continue to work hard, we will remain dedicated to our investment philosophy and we will remain disciplined in the execution of the philosophy. Our desire is to continue our hard work in achieving excellent returns for our clients.
Randall S. Herion
Chief Investment Officer
Liberty Hill Capital, LLC
*These statistics are courtesy of Joel Greenblatt, Gotham Funds manager and Columbia Business School Professor.