A User s Guide to the Chiron Investment Framework

Transcription

1 A User s Guide to the Chiron Investment Framework At Chiron, being transparent with our clients on our asset allocation framework and security selection process is paramount to our success. The Chiron Investment Framework seeks to protect client assets in drawdowns and to position client assets for possible appreciation in rising markets. The following user guide is designed to help our clients understand what our framework seeks to do and what they should expect from Chiron. At Chiron, our investment process is an actively managed framework that allows us to quantify fundamental factors to systematize our approach and apply judgment to asset allocation and security selection. We share our approach with our clients in this User Guide. Overview The Chiron Investment framework, which includes our Domain Indicator and Dispersion Indicator, will give reasonable insight to our clients where our asset allocation may reside relative to neutral. Our framework emphasizes two super factors when analyzing securities: earnings quality and dispute. The framework is used to help guide our judgement in the global asset allocation process.

2 The Chiron Framework Earnings Quality In the Chiron framework, we believe that companies with high quality of earnings produce more lasting and durable alpha while also performing better in market drawdowns. Earnings quality is also an effective metric in all Domains, Value through Growth. We begin by measuring earnings quality, then use fundamental analysis to look for any changes positively or negatively that can affect the quality of earnings. This helps us to identify attractive and unattractive equity and debt issues. Earnings quality is one of the two pillars around which our research framework is built. Source: Chiron Investment Management, LLC Dispute In our framework, stocks and bonds that contain characteristics that exhibit negative management action, combined with adverse investor reaction, reside in the Chiron Dispute Model. This proprietary model identifies securities that we believe should be avoided as they exhibit elevated security specific risk, as well as multiple factors that have historically produced underperformance in market drawdowns. Our fundamental research process then seeks to identify changes in earnings quality, management behavior, and investor reaction when analyzing these securities

3 The Chiron Framework Our framework is consistent, rigorous, and disciplined across geographies and asset classes. Our process allows us to understand where to go based on the Domain a market is trading in and its level of Dispersion in valuation. Our asset allocation framework is determined by understanding, on a market-by-market basis, and asset-class-by-asset-class basis, what domain a market is trading in and what level of dispersion is present. This aids in our understanding of where to start and where to go. Source: Chiron Investment Management, LLC The Chiron Indicators The Chiron Dispersion Indicator The Chiron Dispersion Indicator allows us to measure how we believe investors are valuing equity issues. When the Dispersion Indicator is showing a wide reading (above 1 standard deviation) investors are valuing the most expensive stocks very differently than the market average. When the Dispersion Indicator is showing a narrow reading (0 to -1 standard deviation), investors are valuing equity issues relatively the same. This indicator is very similar to bond spreads, when the indicator is narrow and rising, distress is building. When the indicator is wide and falling, valuations are narrowing and distress is falling. The Chiron Domain Indicator The Chiron Domain Indicator allows us to understand what Domain: growth, value or growth at a reasonable price, that the market is rewarding. As a general rule, when the Chiron Domain Indicator reads 1, we believe that the market is favoring Deep Value. Clients should expect the equity issues to have a value orientation and high yield credit to be emphasized in fixed income security selection. As the indicator rises to 5, a Full Growth domain, Clients should expect issues with characteristics of growth to be emphasized while credit quality will rise within the fixed income portion of the portfolio.

4 Chiron Asset Allocation The Dispersion indicator should be viewed in conjunction with the Domain Indicator in the following manner: - When the Domain indicator is 1 (Value domain) and the dispersion indicator is wide (above 1 Standard Deviation) the equity allocation will likely be higher than neutral with an emphasis toward valuation in security selection. The credit allocation will be lower quality in nature with a higher relative weighting in the fixed income allocation. - When the Domain indicator is 5 (Growth domain) and the dispersion indicator is narrow (0 to -1 Standard Deviation) the equity allocation will be lower than neutral with an emphasis toward growth issues. The Fund s credit allocation will be higher quality in nature, with a lower relative weighting in the fixed income allocation and a potential increase in the cash allocation. - When the Domain Indicator is between 2-4 and Dispersion Indicator is between 0-1 clients should expect asset allocation to be neutral to the Fund s benchmark (60/40) and will include equity issues of growth, value and growth at a reasonable price with credit quality to be neutral relative to the benchmark. Of course, the indicators do not replace sound investment judgment honed by years of experience. Our portfolio management team follows the Indicators unless, based on their experience, the Indicators are presenting a mixed or contradictory measure. In such cases, the team evaluates the signals and their relative weightings and makes modifications necessary for the model to address prevailing market conditions. Chiron Framework The Chiron Investment Framework is predicated on management action and investor reaction. Our framework looks to identify change regarding both elements and to be proactive in understanding the conditions that we believe the market is going to emphasize. We cannot predict the future but we can give clients a roadmap to understand where to start in allocating global portfolios and what condition sets to emphasize. Our framework emphasizes earnings quality, as we believe it to be the most durable characteristic in alpha generation as it is effective across domains. Portfolio company management teams can influence earnings quality both positively and negatively. Our process also emphasizes the avoidance of underperformance through our Dispute Model. We look for characteristics of management actions and investor reaction that lead to significant underperformance. Management actions such as accelerated capital deployment and expansion of fixed assets can be viewed differently depending on which Domain the market is rewarding. In a Value domain, managements are often penalized for expansion. In a Growth domain, expansion is often rewarded. Our Dispute Model helps us to identify issues that are under dispute in the current domain and can lead to significant underperformance in market drawdowns.

5 Chiron Investment Management, LLC is a registered investment adviser. Investing involves risk, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. In addition to the normal risks associated with investing, international investments may involve risk or capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets involve heightened risks related to these factors as well as increased volatility and lower trading volume. REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. The strategy may invest in derivatives, which are often more volatile than other investments and may magnify the gains or losses. Chiron Investment Management is an active manager that uses a variety of analytical tools and market signposts that inform its investment decision making. The materials contained herein are provided for illustrative purposes only and are not intended to constitute investment advice or an investment recommendation within the meaning of the federal, state, or local securities laws. These charts contain historical market data only and do not reflect actions that were or might have been taken by the Chiron Investment Management team if faced with similar data inputs. You are solely responsible for evaluating and acting upon the information contained in these materials if you choose to act on them without the involvement Chiron Investment Management as your adviser. Chiron Investment Management will not be liable for any direct or incidental damages or losses resulting from applying any of the information obtained from these materials or from any other source mentioned. Chiron Investment Management does not render any legal, tax or accounting advice and the educational and market information contained in this material should not be construed as such. Please consult with a qualified professional for advice in these disciplines. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The variables selected for use in the computations shown are for illustrative and educational purposes only and were selected in the sole opinion of Chiron Investment Management, LLC and may change without notice at any time Chiron Investment Management, LLC. All rights reserved.