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GCM All Cap Core Portfolio
GCM's investment approach begins with an "inclusionary" quantitative process incorporating proprietary models and analytical techniques searching for companies that possess three characteristics; superior quality, value, and improving business prospects. Once an opportunity universe is identified, companies go through a bottom up fundamental research process confirming these three factors truly exist. Portfolio construction and monitoring implements risk controls that tend to preserve capital and reduce downside risk. Finally, the firm believes performing this disciplined repetitive process across both current holdings and investment opportunities, generates a higher probability of success over full market cycles.
FIRST,we use quantitative analysis to continuously search for high quality, undervalued companies with improving business prospects. We also consider a number of liquidity measures to ensure the stock is adequately tradable. This process narrows our focus from our initial universe of roughly 3000 companies to approximately 100 securities. Notably, this step is "inclusionary" with the objective of finding as many companies as possible that meet our criteria of quality (Q), value (V), and business prospects/ earnings growth (E). This inclusionary approach is conducted on a weekly basis.
Sampling of variables Portfolio Managers validate:
Quality (objective is to mitigate risk) Equal weight
- Stock volatility
- Earnings consistency
- Debt to equity
- Profit margins
- Credit scores / rating
Value (objective is to enhance returns) Equal weight
- Price to cash flow
- Price to earnings
- Price to value
Business Prospects (objective is to enhance returns) Equal weight
- Accelerating earnings
- Upwardly moving estimates
- Positive same store sales trends
 SECOND, our investment team analyzes the approximately 100 companies (of which 30-35 are already in the portfolio) from the focus list to confirm that new securities and existing holdings meet our criteria of V, E and Q. Our fundamental analysis includes an overview of the stock, the company, sell-side or Wall Street sentiment, and management of the company. Companies are assigned to the portfolio managers/analyst by sector with ongoing research performed throughout the week. As needed, the investment committee meets to discuss findings, play Devil's Advocate, and openly exchange ideas. Though the GCM process follows clearly defined decision rules, occasionally there are differences in opinions given that the investment committee is comprised of strong independent thinkers. When there is an impasse, Lead Portfolio Manager, Philip Mendelsohn has final decision making authority. The fundamental portion of our process is critical in validating V, E, and Q and typically narrows our focus list ranging from 10-20 securities.
THIRD, a final portfolio of 35-45 stocks is constructed given diversification parameters, risk assessment, and strength of new positions versus incumbent. We may use BIRR Risk Optimizer software to limit sector and industry exposures to help craft a portfolio with focus on maximizing return at a similar risk level to the Russell 3000. We typically build positions into "probing" positions of 2% and move up in 1% increments to a maximum of 4% at cost. We sell if two of the three variables of V, E, & Q weaken; we trim on fundamental deterioration in company earnings. Portfolios are all managed alike thus individual portfolio managers do not have discretion to override committee decisions.
Throughout the process, we maintain the same level of focused analysis in monitoring the current stocks we own as we do in considering new purchase and potential sell candidates. Thus you can consider the GCM process as a continuous pursuit for better stock opportunities while we continuously monitor our client portfolios. Because the All Cap strategy allows for flexible market cap weightings, the portfolio manager is able to introduce the “best idea” into the portfolio regardless of market cap (within investment guideline constraint). This has been a key element to the portfolios consistent alpha and high information ratio.
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