Disciplined Leadership Approach

Success comes from executing a strict discipline that dictates the investment process, each and every day.

An effective investment process requires objectivity to maintain consistency, while having the subjective skill to ensure sensibility. Most importantly, such a process needs to have demonstrated validity in all types of market conditions.

Our success over the long term has come from our willingness to differ from the market – without regard to an index – when necessary, and to take on greater responsibility for the clients we manage. This means being able to accept the challenge that comes from addressing capital preservation as part of our investment process. Over time, we have developed the analytical tools and strict rules-based process to objectively manage portfolios through all types of market conditions – the Disciplined Leadership Approach™.

There are three factors that impact portfolio returns: market, sector, and security. At Barometer, we actively address all three of these factors through our investment process.

Having evolved through the secular bull market of the 1980s and 1990s, the investment industry has generally been built to address only one element that drives portfolio returns: security selection. As a result, during more challenging financial markets, the critical market and sector decisions are typically deferred to the end investor through their choice of relative return money manager or fund strategy. In order to properly address all the factors that impact portfolio returns, our investment team strictly abides by the Barometer Disciplined Leadership Approach™, which is comprised of three distinct elements:

Top-Down Process

“As an absolute return manager, we focus on identifying emerging and durable themes and taking the time to fully understand what’s driving market behaviour.”

On a daily basis, we assess market risk and identify market leadership through our top-down methodology.

This process begins with the review of proprietary risk models to first assess risk at the portfolio level – in effect to ask the question: “Is now the right time to be invested?”

Then, through our sector risk models, we further screen 41 asset classes, sector silos, and geographic markets to identify pockets of the market that are experiencing positive capital inflows. By isolating areas of the market that are attracting fresh investor appetite, we are able to isolate markets or sectors that are undergoing a positive revaluation.

While screening provides an objective indication of capital flow, we believe that this must be accompanied by a thorough macro analysis to ensure that we understand what is driving a revaluation trend. In addition to identifying an emerging investment theme, it is critical that we take the time to understand both the technical and fundamental factors at play. This helps ensure that we are able to properly identify the most appropriate security candidates for investment.

Bottom-Up Process

“For us, security selection means finding “good, getting better” not “broken getting fixed”

Concurrent with our top-down methodology, we employ a daily screening process within a universe of 71,000 securities using proprietary criteria designed to identify securities, undergoing positive change – that through some change in their business model or product offering these companies are reflecting an underlying acceleration in their business.

Companies that emerge from our screening process are then subjected to further due diligence to ensure that we fully understand the underlying business model and industry factors. These include face-to-face management meetings, external research support, and internal financial modeling. Running independent of our top-down process, our bottom-up screening is designed to proactively identify leading companies across all sectors of the market to ensure a robust set of portfolio candidates for consideration.

Our bottom-up methodology is effectively designed to identify multiple expansion candidates – to find companies that are undergoing positive change in their business, leading to stronger earnings growth than their peers, and at the same time are operating in a market or sector that is attracting higher earnings multiples.

Disciplined Selling Strategy

Having a disciplined selling strategy ensures that manager bias does not adversely impact market return

The sell decision is a critical element of effective portfolio management – being a good seller is just as important as finding the right investment candidate.

At Barometer, our disciplined selling strategy is a fundamental aspect of our investment process and starts with each position entry. Once we invest in a security, we immediately assign a stop/loss alert to it. If the price of the security rises as expected, we add to the position and subsequently raise our stop/loss alert – we will never add to a position on a price decline. All stops/loss levels are based on technical trend models that are designed to provide an indication of a break in the long-term price advance of a security. In order to maintain our objectively, our trade desk manages the stop/loss alerts, assisting the portfolio managers in their sell decision process.

In addition to our stop/loss methodology, we also engage in a daily ranking of portfolio positions by each member of the investment and research teams. This provides an objective framework for ensuring that portfolio positions make sense given what we continue to learn, and it ensures that our portfolio managers are held accountable for the positions that they hold. Fundamentally, if we have an opportunity to invest across a universe of 71,000 securities, there is little reason to hold a position if better opportunities are available.

These two elements of our disciplined selling strategy are critical in helping control the overall level of volatility in our portfolios, as well as helping to minimize capital loss. While we appreciate the idea of investing over the “long term”, we also recognize that time horizons can become variable, and recovering from material losses may take years. Recovering from losses means forfeiting gains.

At Barometer, we consider cash as an asset class. Our stop/loss process, in conjunction with our daily market risk monitoring, naturally facilitates the accumulation of cash during periods of market stress – we will build if and when conditions deteriorate. We only deploy cash when market breadth models turn positive, and only to areas that are demonstrating emerging leadership. In the absence of leadership, cash positions are maintained.