The Pillars of Our Process

The investment team searches for companies that are considered, according to our investment methodology, as well positioned for long-term growth driven by the demand for their products and services, trading at substantial discounts to their fair market value, and are at an early stage in their potential profit cycle. After conducting thorough research and analysis, we implement the rule of “Would we buy the entire company if we could?” We evaluate companies based on financial strength, levels of profitability, strong management teams, and the possibility to deliver long-term earnings power.

Since we look at any potential investment as though we are buying the whole business, we spend time studying the industry, the industry participants, and the drivers of the revenue and expenses in an effort to come up with an accurate industry growth rate for the future. We typically visit companies that we invest in and spend time with customers, suppliers and competitors to understand the business and see how that business fits within its industry in an effort to come up with an accurate five and ten year earnings forecast.

Rather than relying on one CIO, Edgewood is committed to a strong and coordinated team approach when making investment decisions; individual portfolio managers and analysts do not act independently. All recommendations are presented to the Investment Committee by one of our six portfolio managers and all new investment decisions are made on a unanimous basis. The Investment Committee aims to meet formally once a week and informally on a daily basis.

We place an 8% limit on investments in any one security and a 25% limit on investments in any one sector, as defined by Edgewood's Investment Committee. We minimize liquidity risk by generally investing in companies with a greater than $5 billion market capitalization and adequate trading volume. We pay close attention to the revenue inputs of each company in the portfolio to make sure we are not taking any undue industry or sector risk in investing client capital. Additionally, we aim to diversify across growth rates and market caps to achieve the desired return and risk profile.

Every day, we are evaluating every position. When a potential new holding is introduced to the universe, it forces the team to challenge the conviction level of all of the existing stocks in the portfolio. Portfolio construction is generally defined at 22 companies with the limitation that for a name to be added, another name must be sold.

To sell a stock it requires a majority vote by the Investment Committee. If a company misses earnings two quarters in a row, there is a 15% drop in the stock relative to its peers or if there is a change in industry or company fundamentals, the Investment Committee will discuss selling the stock, decreasing the weighting in the portfolio or adding to the weighting in the portfolio.

The primary Portfolio Manager responsible for the stock loses coverage and it is reassigned to one of the other Portfolio Managers. At that point, the company is reassessed against the original investment thesis given the new information and a recommendation is presented to the Investment Committee. The original Portfolio Manager stays on the committee as a source of information but loses his vote in the decision. A majority vote (3-2) is required to remove a stock from the portfolio.