Knightsbridge Philosophy
Throughout its track record, Knightsbridge has extensively researched areas of market inefficiency. The firm’s investment approach is designed to take advantage of infrequent and unusual occurrences in the marketplace that can produce undeserved, temporary undervaluation. We refer to these opportunities, believed to offer higher probability of longer-term outperformance, as ‘investment anomalies’. They represent a hall-mark of our investment strategy.
Portfolio investment occurs among this limited universe of stocks exhibiting ‘investment anomalies’. Characteristics of investment anomalies include forced turnover of a shareholder base, limited available information and analyst coverage, unusual and complicated accounting, supply/demand imbalance among shareholder constituencies and other structural dislocations. It is believed that these characteristics produce undervaluation which may be resolved over time as anomalistic conditions normalize. This belief is backed by rigorous statistical research conducted by Knightsbridge which indicates these opportunities signal share price appreciation potential.
Beyond statistical research, Knightsbridge conducts ongoing fundamental valuation work in order to identify stocks exhibiting desired discounted valuation relative to peers and historic norms. Stocks purchased also typically operate in out-of-favor industries in terms of performance, valuation and sentiment. Acceptable financial leverage and strong cash flow and revenue per share alongside earnings improvement potential are additional common attributes of stock purchases. Stocks purchased are deemed to offer 100% return potential over a three to four year period as earnings and valuation improve. Stocks are typically sold when no longer undervalued, no longer out of favor, or when the potency of the anomaly wanes.
Key attributes associated with the firm’s flagship strategy, Knightsbridge Opportunistic Value Equity:
- Opportunistic investment across the full range of market capitalization
- Portfolios concentrated among 15 to 25 stocks
- Portfolio construction without regard to any benchmark
- Sector weightings are residual of stock selection
- Absolute return orientation with periodic use of cash as a defensive tool
- Turnover averaging 25 to 35% over a full market cycle
- Emphasis on after-tax returns where relevant
