In line with our firm culture of managing risk appropriately and seeking to preserve client capital in times of duress, Silvercrest believes that when investing in equities, certain advantages accrue over time to higher “quality” companies. Of course, quality is a somewhat amorphous term.
We try to objectively monitor the quality of our companies by several metrics including:
- Median return on invested capital (ex-financials, which lend themselves to a return on equity metric)
- Balance sheet integrity, where we examine debt to capital ratios, as well as net debt/EBITDA
- Cash flow generation and its relation to net income
- Earnings per share volatility, including money earning companies vs. money losing companies
Generally, at the portfolio level, our approach tends to manifest itself in higher quality as measured by these metrics compared to the respective value benchmark.
Our approach tends to manifest itself in higher quality as measured by these metrics compared to the respective value benchmark.
We have captured the metrics that we feel define “quality” in our philosophical approach where Silvercrest seeks to assemble a diversified portfolio of higher-quality companies that can potentially deliver 3–5 year growth in the mid-single to low-double-digits of cash flow, earnings per share, sales and/or book value. This is true for all but one of our value equity strategies; our Focused Value strategy, owning a maximum of twenty stocks, does not offer the same level of diversification as our other strategies.
Careful attention to valuation enables us to take advantage of marketplace mis-pricings to invest in these companies at opportune moments, giving our portfolios the potential to benefit from an upward revaluation compounded by the companies’ intrinsic growth. By focusing on companies with strong financial profiles and high market shares, these companies have proven to be logical candidates for acquisition by either larger firms or financial buyers. We believe this approach gives us a reasonable chance to earn a high-single to low-double-digit return with volatility at or below that of the benchmark indices.
Careful attention to valuation enables us to take advantage of marketplace mis-pricings to invest in these companies at opportune moments.
In analyzing historical performance, typically, Silvercrest portfolios have outperformed their respective benchmarks in periods when the benchmark was negative. In large part, we think this is due to our quality orientation, which makes some intuitive sense in a fearful, risk-off environment. Alternatively, in a risk-on environment, including perhaps a period of accelerating economic growth where investors hope that robust business conditions can “fix” balance sheet and cash flow issues, we may lag our benchmarks.
Silvercrest portfolios generally have shown below-index volatility of returns as measured by standard deviation. Here too, we believe our companies’ higher-quality business models, with their attendant lower variability of earnings, is one of the primary contributing factors.
While many attributes that we believe indicate higher quality in a company are well known by other investors, harnessing the long-term experience of our team and staying disciplined when executing the philosophy over time is one of the most critical aspects of actively managing portfolios. By remaining focused on better-quality businesses as measured by returns on capital, balance sheet strength and dominant market shares in niche businesses, the team gives itself the opportunity to invest in businesses that should grow over time regardless of the macro environment. Silvercrest’s long-term focus and strong valuation work provides the confidence to look through the current issues affecting a company and make profitable long-term investments for our clients.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Vogel. No part of Mr. Vogel’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed.
