Thematic Gains

Aug 31, 2010

When combined with prudent and consistent risk controls, thematic investment may serve as a good source of sustainable returns. Portfolio manager Jason Sheer provides insights into how The Roosevelt Investment Group looks for opportunities across the globe regardless of company size and location.
“The goal of our unique risk management approach is to reduce the portfolio’s downside market exposure while still allowing for its participation in up markets.”
Q: What is the history of the company?

In 1971, P. James Roosevelt, a cousin of former President Theodore Roosevelt, founded the investment advisory firm P. James Roosevelt. The name was changed to The Roosevelt Investment Group in 1993.

In 2002, The Roosevelt Investment Group merged with Sheer Asset Management, an investment advisory firm founded in 1990 by my father, Arthur Sheer. The combined company is now called Roosevelt Investments. The firm is based in New York with an office in Providence, Rhode Island.

We are a privately held, 100% employee-owned firm. Currently, we have over $5 billion in assets under management. We offer several investment strategies, including our All Cap Core Equity and Global Enhanced Fixed Income portfolios. We also handle separately managed accounts and run a mutual fund, The Roosevelt Multi-Cap Fund.

Our clients include pension funds, endowment funds, closely held corporations, and private client accounts. In addition, we offer investment management services to financial intermediaries through separate account platforms.

Q: What core principles guide your investment philosophy?

We attempt to identify economic, political, social, demographic, and industry-specific undercurrents that can be translated into long-term investment themes. In addition, we employ well-defined risk management principles that aim to reduce the portfolio’s exposure to downturns while maximizing its participation in up markets.

Q: Would you elaborate on your theme-based investing approach?

For example, at one point we identified an imbalance in supply and demand in the agriculture sector. On the supply side, food stocks globally were at multi-decade lows. However, demand from emerging markets was increasing as was global demand for corn due to the increased usage of corn-based ethanol.

We believed these factors would drive up demand for agricultural commodities and on the basis of our analysis we looked for companies that stood to benefit. One company that we arrived at was Monsanto Company, a provider of agricultural products for farmers. Monsanto had a strong R&D pipeline in the area of genetically modified seeds, which could be used to increase farmers’ yields. This would be an obvious benefit in an environment where supply is constrained but demand is growing.

From a stock perspective, we thought that Monsanto was actually more like a biotech company than a traditional agricultural chemicals company. And we believed the company should be valued as such, which would translate into a pretty significant multiple expansion. We saw the potential for the PE ratio to move from the low teens to maybe 20, 30 times. At the same time we also anticipated rapid earnings growth based on increased demand.

Q: How do you convert this philosophy into an investment strategy?

The firm’s holdings include public equity and fixed income securities and we invest both in growth and value stocks of global companies of almost any size. The only restriction we have is that we typically don’t invest in stocks with a market cap of less than $1 billion because at lower levels liquidity becomes a constraining factor.

We employ a synthesis of “top-down” and “bottom-up” analyses. The top-down fundamental research process is designed to identify thematic opportunities like changes in government regulations, technology, industry consolidation, and demographics. We then use extensive bottom-up fundamental research to confirm investment themes. We conduct intensive research and apply rigorous fundamental financial analysis. We identify dominant companies positioned to benefit from major fundamental changes with increasing financial returns. Lastly, we typically like to identify a catalyst that will release value or propel earnings growth.

Q: Would you describe your research process and highlight it with some examples?

We have an active and ever-evolving process of scouring the markets for companies that we view as long-term beneficiaries of our thematic analysis. Our theme-based focus is the filter we use to select companies that are likely to outperform over the long-term in a variety of market conditions.

In deciding whether to buy a company’s stock, we evaluate a multitude of factors. There may be internal developments that are stock specific, such as a corporate restructuring, new management, new products, expanded distribution capability, or a synergistic merger, that would make a company a possible investment for our portfolios. An external catalyst may be related to one of our investment themes and may represent a change in an individual company’s business prospects. We typically calculate our own earnings estimates.

We are also rigorous in our efforts to keep in touch with the management teams of the companies that we own or are considering buying. We regularly hold conference calls and host face-to-face meetings and attend corporate presentations. Such an investment on our part enables us to learn the most we can about an individual company’s dynamics as well as relevant shifts across the economic landscape.

We also talk to companies about their investments in research and development. We like to know how and why companies make such investment decisions. This input helps us to analyze each particular company and it also helps us determine if there are other companies that stand to benefit from those investment dollars.

A good example of a current portfolio holding would be DreamWorks Animation SKG, Inc., a company engaged in the development and production of animated films. We think DreamWorks stands to gain from the current revival of interest in 3D movies. And, at the same time that demand is on the rise, the incremental cost of producing a film in 3D is dropping pretty dramatically due to technological improvements. The incremental value that DreamWorks can derive from developing 3D movies is substantial and is very much a revenue driver and a margin accelerator.

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