Investment Process Flow Chart

Our Investment Process

A great deal of thought and work goes into the management of Broadleaf’s Growth Equity Portfolio and the initial investment of a new client’s assets. While we cannot control the outcome, we can control the input that goes into investment decisions on our client’s behalf. To this end, we pledge that we will undertake all efforts necessary to ensure we create an environment conducive to superior returns.

Starting the Day 
Our typical day follows a rigid process of assessing market-related news before the markets open. We have daily contact with Wall Street research firms, subscribe to professional online services like Briefing.com and read several publications including the Wall Street Journal.  Following this informational gathering stage, we then turn to the portfolio itself, reviewing the performance of individual names and considering candidates to be bought, sold or trimmed.   

Looking for New Ideas
We are always looking for new ideas from a variety of sources, screening for a combination of superior growth and profitability characteristics and balancing these against valuation and technical considerations. Our preference is for companies with a high return on equity, strong free cash flow yields, rising earnings estimates, and increasing institutional sponsorship. While every holding is unique, we prefer to buy a company at a discount to its 52-week high unless we are aware of significant fundamental developments that could make a continued break-out likely. We undertake a formal process of looking for new ideas and from this process, maintain and update a composite of new ideas for possible future use.

The Sell Discipline
All of our investments are made with the intention to hold for the long-term.  However, we also believe a strong selling discipline is necessary to guard against becoming emotionally tied to a single investment, particularly in a market full of promising opportunities and ideas. Like a garden, we believe regular weeding and pruning is necessary for the long-term health of the portfolio.

We will sell or trim a position for one of the following four reasons: 

1. Perennials versus Annuals: The Macroeconomic Trigger.  In these situations, the decision to sell specific names is typically unrelated to our assessment of a company’s fundamental position, but is instead due to a change in our thinking about how a sector will perform in a changing economic climate. 

2. Weeding: The Downside Trigger.  Anytime a stock declines 15% relative to the market, it will be added to our watch list for potential sale.  For smaller capitalization or less liquid names, this relative underperformance threshold may be extended to down 25%.  We realize that we will not buy all positions correctly.  Experience has taught us, however, that a significant decline in a specific holding – particularly in a favorable market environment – may occur for reasons that are not yet generally understood or known and more importantly, for reasons that may linger. 

3. Pruning: The Upside Trigger.  Just as important to minimizing downside losses is pruning names that generate significant relative outperformance for the portfolio.  We will generally pare any name that outperforms the S&P 500 by 50% over a similar period of time. For example, if Company ABC were to gain 55% in a quarter where the S&P 500 gained 5%, we would trim Company ABC by approximately 20%. We would continue to repeat this pruning procedure at subsequent 50% increments. If after three pruning’s, the holding continues to outperform, we will take action to ensure that it doesn’t exceed 10% of the portfolio’s overall value. This discipline will keep company-specific risks under control in the portfolio and will also help us to realize some gains along the way, thereby accomplishing the ultimate goal of “buying low and selling high.” 

4. Making Room in the Garden: Planting a New Idea. In general, the decision to purchase a new name is made possible by the decision to sell a current holding for one of the above reasons.  However, there are also times where we simply come to like a new name so much that we must make a relative decision among good opportunities. In these cases, what we decide to sell is based on fundamental and technical considerations, as well as issues of overall portfolio concentrations in individual names and industries.