We believe the irrational behavior of investors can render the market inefficient, providing opportunities to buy mispriced securities at a discount from their economic value. We seek to capitalize on these opportunities while remaining true to our guiding principles of prudence, discipline and patience.
Our experience has shown that stock prices do not always accurately reflect the intrinsic value of companies. Using the “margin of safety” concept first introduced by Benjamin Graham in 1934, we employ a prudent investment process that allows us to capitalize on these market inefficiencies on behalf of our investors.
Our highly disciplined quantitative approach to evaluating equities based on intrinsic value allows us to block out emotion, market noise and other factors that have the potential to interfere with rational investment decisions. We avoid speculative strategies such as market timing and seek a wide margin of safety in order to reduce investment risk and maximize potential long-term returns.
Our investment strategy is designed to deliver steady, long-term performance and is not well suited for investors who seek short-term returns through market timing. We seek to partner with investors who have the patience and time horizon to take advantage of the power of compounding. Our funds are designed to allow long-term investors the advantage of reduced market risk and bolstered returns through the minimization of transaction costs and taxes.
We specialize in developing and managing value-based equity strategies for global, regional and sector funds. Our approach is driven by quantitative market and stock selection techniques that are customized based on each fund’s investment focus. Our strategies incorporate the following.
Active market selection
Our research has shown that, over three- to five-year periods, national equity markets tend to oscillate around equilibrium value levels. Guided by an in-depth analysis of the underlying fundamentals, we seek to enter markets when they are selling at a discount to their intrinsic value and exit them when they are selling at a premium. We believe this approach allows us to achieve higher returns than a buy-and-hold strategy.
Our country selection strategies tend toward equal weighting of markets, subject to liquidity. As a result, smaller markets may carry a higher weight in our portfolios than in market capitalization-weighted benchmarks. Within each market, we strive to keep sector and industry weights close to benchmark levels in order to limit macro-economic risks.
Active stock selection
We aim to construct diversified, attractively valued portfolios by selecting stocks based on high and stable dividend yields and other valuation criteria.
We structure our diversified equity portfolios using objective criteria. This helps reduce risk while providing the opportunity to outperform relevant benchmarks.
All of our strategies are characterized by low portfolio turnover, resulting in low transaction costs.
is a main focus of our investment strategies and an important driver of our success.
The Keppler Ratio
At Keppler Asset Management, we define risk as an expectation of loss, a measure that focuses on the probability and magnitude of potential investment losses rather than the variability of returns.
To measure risk, we apply the Keppler Ratio, a risk-adjusted performance measure developed by our firm’s founder in 1990. The Keppler Ratio provides the return per unit of expected loss. We believe this ratio is a more meaningful measure of risk-adjusted performance because losses (which can be defined as negative returns or negative deviations from the required rate of return) are what most investors perceive as risk.
A more common measure of risk, the Sharpe Ratio, indicates return per unit of variability. We do not use the Sharpe Ratio because it does not distinguish between upside and downside price movements and can therefore lead to questionable risk assessments.
How we manage risk
Our extensive research on global equity markets and our long-term track record with value investing illustrates that, by focusing on value, long-term investors have the potential to both manage risks and achieve superior returns. We employ the following strategies to manage risk in our portfolios.
- Margin of safety: We strive to purchase stocks with an adequate margin of safety in an effort to achieve both downside protection and enhanced upside potential. We also seek to achieve diversification across markets, sectors and stocks in order to further reduce portfolio risk.
- Long-term approach: Given the time-dependent nature of risk, we strive to maintain long holding periods to allow investors to realize the long-term benefits of our prudent portfolio construction and diversification approach. This long-term approach also allows our investors to realize the full impact of compounding.
- A focus on expenses: Transaction costs, taxes and lost upside potential can quickly erode any potential gain of higher risk/higher return strategies. Our low turnover approach allows us to reduce portfolio expenses and maximize returns.