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Alpha Generation

Alpha Generation

For investors, a major challenge is to identify those portfolio managers who are most likely to deliver superior risk-adjusted returns in the future. Understanding how an investment philosophy informs a manager’s decision-making can provide meaningful insights into how and why a particular manager generates alpha.

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Our Investment Philosophy

We are an active manager with a long-term, private equity approach to investing. Through our proprietary bottom-up research framework, we look to invest in those few high-quality businesses with sustainable competitive advantages and profitable growth when they trade at a significant discount to our estimate of intrinsic value.

Highlights

Long-Term Investor
Private Equity Approach
Bottom-Up Research
Selective Investing
Secular Growth
Margin of Safety*
Active Risk Management

Long-Term Investor

In our view, a long investment horizon affords us the opportunity to capture value from secular growth opportunities as well as capitalize on the stock market’s shortsightedness through a process called time arbitrage.

Private Equity Approach

Because we approach investing as if we are buying into a private business, a long investment horizon is central to our philosophy.

Bottom-Up Research

Our proprietary seven-step research framework represents our long-standing insights about investing and is structured around three key criteria: Quality, Growth and Valuation.

Selective Investing

Our Quality-Growth-Valuation investment process begins with the art of trying to identify high-quality companies—those with unique, difficult-to-replicate business models and sustainable competitive advantages.

Secular Growth

We are looking not only for above-average growth, but secular and profitable growth. Easier said than done, as empirical evidence shows only 10% of companies can sustain above-average growth rate over a four-year period.i

 

i Chan, Karceski & Lakonishok, “The Level and Persistence of Growth Rates,” The Journal of Finance, Volume LVIII, No. 2, April 2003.

Margin of Safety*

We are seeking companies that can generate sustainable and profitable growth and invest only when they are selling at a significant discount to our estimate of intrinsic value.

 

*Holding all else equal, the larger the discount between market price of a particular security and our estimate of its intrinsic value, the greater we view our margin of safety. Margin of safety is not an indication of the strategy’s safety as all investments carry risk, including risk of loss.

Active Risk Management

Because we define risk as a permanent loss of capital, we take an absolute-return approach to investing and seek to actively manage our downside risk.

Our Seven-Step Research Philosophy

Loomis, Sayles & Company
The cornerstone of our investment
decision-making process

Seven-Step Research Framework

“High-quality businesses are rare. We believe less than one percent of all businesses are able to sustain their competitive advantages beyond a decade. We also believe less than one percent of businesses can generate durable and profitable long-term growth. Demanding these two characteristics means we must be very selective and patient investors.”

Aziz V. Hamzaogullari, CFA

01
Quality

Sustainable Competitive Advantage

  • Identify unique elements of a company’s business model (e.g., network effect, low-cost advantage, strong brand awareness and high switching costs).
  • Can this company defend and sustain its competitive advantage over the long term?
02
Quality

Competitive Analysis

  • Assess barriers to entry, industry rivalry, power of buyers versus suppliers and substitution threats.
  • Evaluate the entire value chain and profit pool to discern the structural winners in the long term.
03
Quality

Financial Analysis

  • Assess balance sheet health (low or no debt is ideal), capital intensity, business mix and margin structure.
  • Require sustainable free cash flow growth, an ability to meet reinvestment needs and cash flow return on investment above the cost of capital.
04
Quality

Management

  • Partner with management teams who share our long-term perspective, manage the business with vision and integrity, and whose incentive is aligned with long-term shareholder interests.
  • Evaluate management’s ability to allocate capital to investments creating long-term value.
05
Growth

Growth Drivers

  • Evaluate sources and sustainability of profitable growth.
  • Focus on long-term secular and structural growth drivers—dynamics that are not likely to change in five years or more.
  • Forecast the growth rate independent of company guidance or street expectations.
06
VALUATION

Intrinsic Value Ranges

  • A company’s value depends on its long-term ability to generate profitable free cash flow growth.
  • The present value of future free cash flows is our core methodology for estimating intrinsic value.
  • Conduct sensitivity analysis of key variables to assess downside risk and focus on high-impact drivers of value.
  • Best-, base-, bear- and worst-case valuation scenarios guide the timing of buy/sell decisions and help guard against decision-making pitfalls.
07
VALUATION

Expectations Analysis

  • Assess the valuation assumptions implied by the current stock price to differentiate fundamental drivers of value from market sentiment drivers of price. Understand where and how our perspective diverges from that of the market.

We believe a focus on the quality of a manager's investment philosophy, process, and decision-making is essential for assessing the probability of future success. Our alpha thesis encapsulates a deeply held system of persistent beliefs, a rigorous, repeatable investment process and substantive proof points.

Disclosure

This marketing communication is provided for informational purposes only and should not be construed as investment advice. Investment decisions should consider the individual circumstances of the particular investor. Any opinions or forecasts contained herein, reflect the subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Information, including that obtained from outside sources, is believed to be correct, but we cannot guarantee its accuracy. This information is subject to change at any time without notice.

Key Risks: Equity Risk, Market Risk, Non-US Securities Risk, Liquidity Risk.

Investing involves risk including possible loss of principal.

Any opinions or forecasts contained herein reflect the current subjective judgments and assumptions of the Growth Equity Strategies Team only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice.

Commodity, interest and derivative trading involves substantial risk of loss. 

Any investment that has the possibility for profits also has the possibility of losses, including the loss of principal.

Diversification does not ensure a profit or guarantee against a loss.

Market conditions are extremely fluid and change frequently.

Past performance is no guarantee of, and not necessarily indicative of, future results.

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