Investment Approach
QV Investors believes in investing in quality companies with attractive valuations. Simply stated, we seek better returns and lower valuations than the market. We do so by purchasing companies with above average returns on equity capital, but whose shares trade below market valuations. This approach has consistently yielded superior risk-adjusted equity returns over the long-term,
For balanced fund investors, QV complements equity investing by selecting the highest quality fixed income securities.
Our objective of our security selection and portfolio management processes is to secure and protect the compounding rate inherent in any quality business or fixed income security.
Equity and Fixed Income Selection
We buy a portfolio of businesses run by capable, committed, and candid people. We select equities based on good value. We hold our positions for an indefinite period of time.
We believe in selecting well-managed companies, purchased at a valuation consistent with their growth and held for the long-term. We concentrate our analysis on the record and ability of business managers to develop and to finance their franchises and to grow shareholders equity or to pay dividends. We examine the qualities that lead to a sustainable return on equity.
Following from the above, we analyze companies on the following seven basic tests.
Management:
- having a proven record of creating shareholder wealth
- having a financial and/or an experiential stake in the company
Financial Record:
- showing a consistent return on equity and growth in revenues
- showing a disciplined and prudent allocation of capital
Business Franchise:
- resulting from sensible and innovative product, service or resource development and providing promise for the future
- demonstrating competitive and operational advantages
Balance Sheet:
- showing robust equity financing
- fitting with the long-term nature of a business
Valuation:
- offering competitive yields with fixed income securities
- showing multiples of book and cash flow appropriate to the companies sustainable earning power
Dividend & Re-Investment Record:
- showing a record of growing dividend distributions
- showing capital allocation appropriate to capital needs
Quantitative Improvement
- We quantify the above measures for each selection and compare them to portfolios to provide an improvement to our portfolios.
Sale Disciplines
We will sell or reduce our common stock positions based on the failure of one or more of the above selection tests.
Fixed Income Selection
We believe we will achieve steady and reliable returns using bonds, debentures, convertibles, and preferred shares to counterbalance the volatility of equity portfolios. We focus our fixed income investing on higher quality and medium term securities. In a few words -
We buy a portfolio of high quality, but typically shorter-term bonds to create a stable income portfolio
New Selections
To assure clients portfolios are of enduring quality and value, we manage and control he risks of valuation, growth rate, credit, diversification, and liquidity. We subject the character of new recommendations against the characteristics of the established portfolio. New investment recommendations should improve a portfolio.
The Audit
We believe we should regularly audit equity portfolio characteristics relative to the market, to remain committed to and consistent with our objective of better value, quality, and better growth than the market benchmarks. In The Pooled Funds section, we disclose the current measures.
We apply the same audit processes for all equity capitalizations.
Equities
To increase the potential for a positive return and to reduce volatility in client's portfolios, QV manages the qualities or the character of our model, pooled fund portfolios. From the inception of QV Investors, we have "risk managed" both equity and fixed income portfolios, to provide governed results.
We do so to meet our commitment to invest in companies able to re-invest their cash flow at a better return than the market and which trade at better values or lower multiples than the market.
We measure and manage the characteristics of value, growth, credit, liquidity, yield, and diversification. We measure value by the traditional share price multiples of earnings, cash flow, book value, and sales and by the measures of enterprise value.
We use the return on equity, re-investment rates, and return on capital employed for our principal measures of return and growth. We supplement the return measures with the historic growth rates for sales, cash flow, earnings, dividends and invested capital.
Credit quality, we measure, through debt to equity and cash flow to debt, and coverage multiples.
As our pooled funds and strategies require liquidity, we invest and monitor the size of the company as measured by the size of the market capitalization and the float of our holdings.
Fixed Income
To meet our commitment to building fixed income portfolios of better quality and yield but of shorter or comparable term to the benchmarks, we measure the quality, issuer, term, duration, and yield of the portfolio.