0
8001 Franklin Farms Drive, Suite 208
Richmond, VA 23229
Phone: 804.288.6080 | Fax: 804.288.6082
www.redmondassetmanagement...
2
Firm Overview
Redmond Asset Management (RAM) seeks to deliver top-notch client service and above average
investment retu...
Organizational Chart
Investments Operations
Scott Redmond, CFA
Founder
Small Cap Core Portfolio Manager & Lead Analyst
Lea...
4
$0
$100
$200
$300
$400
$500
$600
$700
$800
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 ...
5
Return History1,2,3
RAM Small Cap
Gross Return (%)
RAM Small Cap
Net Return (%)
Russell 2000®
Total Return (%)
2012 22.4...
6
Annualized Returns1,2,3
Ending 31 Dec 2012
1-Year
3-Year
Annualized
5-Year
Annualized
RAM Small Cap
Gross Return
22.4% 1...
Firm Ownership and Compensation
Scott Redmond founded the firm, owns 100% of the firm, and serves as the benevolent dictat...
Core Investment Beliefs
Components of Persistent Long Term Alpha
I. High Active Share
II. Low to Moderate Tracking Error
I...
Science Behind Our Beliefs
I. “Research shows that funds with high active share and moderate tracking error deliver excess...
Manage to High Active Share and Low/Moderate Tracking Error Portfolios
I. NO FACTOR BETS
II. Ownership of Industry Dominan...
Stock Selection
I. Overwhelmingly RAM seeks ownership of
A. Industry Dominant Companies
B. Distinguished Companies
II. Sto...
12
Equity Investment Philosophy
I. Find long term investments in Great Growth Companies through Bottom-Up Stock Picking
II...
13
RAM Margin
 Proprietary Calculation
Adjusted Cash Flow – Adjusted Cost of Capital
Adjusted Invested Capital
 What It ...
14
Typical Investment Process
2000
Company
Universe
Four Screens
 RAM Margin
 Fundamental Growth
 Relative Strength of
...
15
Equity Sell Disciplines
I. Fundamental
A. Loss of confidence in management
 Results in complete sale
B. Fundamental de...
Portfolio Construction
Broad Ensemble of Industry Dominant or Distinguished Companies (50-70 stocks)
I. Drivers (3%-7% wei...
Ownership Mentality
Year First
Purchased
% by
weight*
% by count
2007 24 20
2008 13 9
2009 10 15
2010 15 21
2011 19 22
201...
Our Primary Short Run Risks To Relative Performance
I. Low and Increasing Market Dispersion*
II. Speculative Bubble
III. J...
General View of Risk
I. To RAM Risk Is A Function Of1:
A. The amount of money you stand to lose
B. The likelihood of the l...
Managing Risk
I. Simplified Investment Process1:
A. Accentuates roll of skill versus luck in long run outcomes1
B. Anchore...
Adaptation of Heisenberg Uncertainty Principal
I. In our words: Measurement Perturbs
• Werner Heisenberg concluded you can...
22
Fee Structure1
Asset Amount Annual Fee
Less than $50,000,000 1.00%
Greater than $50,000,000 0.85%
1 Fees are negotiable
Investment Team
R. Scott Redmond, CFA Jeremy Kirkland, CFA Tom Robertson, CFA
 RAM
 Founder
 Small Cap Core Portfolio M...
Operations Team
Jamie Alexander Margaret Phillips
RAM
 CCO, Marketing, Trading, Operations
 Joined RAM in 2010
 Client ...
Third-Party Relationships and Services
Custodians Legal Support GIPS Verification Critical Software
 BB&T
 Charles Schwa...
26
Redmond Asset Management, LLC Small Cap Composite
1 January 2007 through 31 December 2012
Year
End
Composite
Gross
Retu...
Appendix: Current Business Overview
27
$160 Million AUM
Classification Small Cap Mid Cap Large Cap
Fixed
Income
Normal
Ran...
28
Disclaimers
 Past performance is no guarantee of future results.
 Information provided in this brochure is for educat...
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RAM Small Cap Core

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As an emerging money manager, Redmond Asset Management, LLC offers Small Cap Core portfolio management services to institutions, non-profit organizations, endowments, and high net worth individuals via separately managed accounts.

Utilizing our proprietary, “bottom-up” stock-picking model, we look for unique or distinguished companies that meet a variety of criteria and offer the most attractive opportunities for growth of capital.

Published in: Business, Economy & Finance
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Transcript of "RAM Small Cap Core"

  1. 1. 8001 Franklin Farms Drive, Suite 208 Richmond, VA 23229 Phone: 804.288.6080 | Fax: 804.288.6082 www.redmondassetmanagement.com
  2. 2. 2 Firm Overview Redmond Asset Management (RAM) seeks to deliver top-notch client service and above average investment returns by purchasing publically traded stocks that we believe offer superior risk adjusted long term opportunities for growth of capital.  Founded by Scott Redmond in December 2005.  As of December 31, 2012 RAM had firm assets of approximately $156 million.  Located in Richmond, Virginia.
  3. 3. Organizational Chart Investments Operations Scott Redmond, CFA Founder Small Cap Core Portfolio Manager & Lead Analyst Lead Portfolio Manager Jamie Alexander Chief Compliance Officer, Marketing, Operations Tom Robertson, CFA Small Cap Core Analyst Portfolio Manager Jeremy Kirkland, CFA Small Cap Core Analyst Portfolio Manager Jim Jollay Equity Strategist Analyst Margaret Phillips Client Service, Trader, Operations 3 Full bios found on pages 23-24
  4. 4. 4 $0 $100 $200 $300 $400 $500 $600 $700 $800 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 AUMMillions Two Phase Growth Plan Individual SMA Clients Small Cap Core Institutional SMAs Jeremy Kirkland Jim Jollay Tom Robertson PHASE I Develop Bedrock Business Create Small Cap Track Record Status: COMPLETE PHASE II Grow Small Cap Core Maintain Bedrock Business Status: JUST STARTING Marketing Commitment Soft Close $300M Hard Close $500M
  5. 5. 5 Return History1,2,3 RAM Small Cap Gross Return (%) RAM Small Cap Net Return (%) Russell 2000® Total Return (%) 2012 22.4 21.2 16.4 2011 -0.6 -1.6 - 4.2 2010 33.7 32.4 26.9 2009 45.4 44.0 27.2 2008 - 46.4 -47.0 - 33.7 2007 4.1 3.1 - 1.6 1 Past performance is not indicative of future performance. Client investment returns will be reduced by the advisory fees and other expenses it may incur. Advisory fees are negotiable. 2 GIPS Compliant Presentation found on page 25. 3 Returns are shown in U.S. Dollars.
  6. 6. 6 Annualized Returns1,2,3 Ending 31 Dec 2012 1-Year 3-Year Annualized 5-Year Annualized RAM Small Cap Gross Return 22.4% 17.6% 4.9% RAM Small Cap Net Return 21.2% 16.4% 3.8% Russell 2000® Total Return 16.4% 12.3% 3.6% 1 Past performance is not indicative of future performance. Client investment returns will be reduced by the advisory fees and other expenses it may incur. Advisory fees are negotiable. 2 GIPS Compliant Presentation found on page 25. 3 Returns are shown in U.S. dollars.
  7. 7. Firm Ownership and Compensation Scott Redmond founded the firm, owns 100% of the firm, and serves as the benevolent dictator Meritocratic Compensation (don’t bother asking for the formulas) I. The source of revenue is the source of compensation A. Analysts are evaluated on long term performance of recommendations vs. the benchmark and the proprietary screen B. Portfolio Managers are evaluated vs. Analyst Recommendations C. Analysts and Portfolio Managers may earn a portion of New Business/Client Retention revenues Succession Plan I. Key Person Insurance exists for Scott Redmond and Jeremy Kirkland II. Should Scott Redmond die A. Chief Legal Counsel becomes interim CEO B. Resources are in place for an orderly transfer of ownership and responsibilities 7
  8. 8. Core Investment Beliefs Components of Persistent Long Term Alpha I. High Active Share II. Low to Moderate Tracking Error III. Low Turnover IV. No Factor Bets V. Investing is More Art Than Science (More UC Berkley than Caltech) 8
  9. 9. Science Behind Our Beliefs I. “Research shows that funds with high active share and moderate tracking error deliver excess returns on average.”1 II. Active Share2 A. “Active Share significantly predicts fund performance relative to the benchmark.”2 B. “We also find strong evidence of performance persistence for funds with highest Active Share.”2 C. “Active Share has greatest predictive power for returns among small-cap funds.”2 III. Proprietary Analysis by RAM 1Michael J. Mauboussin, “Mauboussin on Strategy”, February 24, 2012 http://www.petajisto.net/media/20120224lm.pdf. 2K. J. Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” March 31, 2009 http://www.petajisto.net/research.html 9
  10. 10. Manage to High Active Share and Low/Moderate Tracking Error Portfolios I. NO FACTOR BETS II. Ownership of Industry Dominant or Distinguished Companies A. Diversify by business, not by GICS Sector Code B. Reduced Systematic Risk III. Long term exposure to “Antifragile*” Companies *The term “antifragile” was introduced by Nassim Taleb 10
  11. 11. Stock Selection I. Overwhelmingly RAM seeks ownership of A. Industry Dominant Companies B. Distinguished Companies II. Stocks usually originate from a Proprietary Screen, but may come from other sources III. Up to 5% of the portfolio is allocated to immature or speculative companies IV. The Process is 90% fundamental and 10% quantitative 11
  12. 12. 12 Equity Investment Philosophy I. Find long term investments in Great Growth Companies through Bottom-Up Stock Picking II. Great Growth Companies exhibit the following: A. Outstanding Management and Corporate Culture B. Industry or Niche Dominance C. High or Rapidly Growing RAM Margins* D. Disciplined use/reinvestment of cash III. We believe our stocks could outperform the stock market over the long run because: A. Cash generation creates wealth for the company B. Prudent reinvestment of that cash increases company wealth even more! C. Eventually, an increase in company wealth may translate into proportionately higher stock prices *a proprietary calculation
  13. 13. 13 RAM Margin  Proprietary Calculation Adjusted Cash Flow – Adjusted Cost of Capital Adjusted Invested Capital  What It Means To Us Consistently positive RAM Margins may indicate:  A well run company  Operating in a Niche, or  Dominating an industry Rapidly rising RAM Margins may indicate:  Change in competitive landscape  Past investments starting to pay off
  14. 14. 14 Typical Investment Process 2000 Company Universe Four Screens  RAM Margin  Fundamental Growth  Relative Strength of Stock Price  Earnings Estimate Revisions 200 Candidate Companies Fundamental Analysis  Growth Prospects  Competitive Advantage  Corporate Culture Return Expectations  Earnings Based  Cash Flow Based Portfolio Considerations  Sector Weight  Liquidity 50-70 Stock Portfolio
  15. 15. 15 Equity Sell Disciplines I. Fundamental A. Loss of confidence in management  Results in complete sale B. Fundamental deterioration  We usually scale out as evidence of deteriorating fundamentals builds II. Price Related A. Overvaluation  We usually scale out as the stock becomes overvalued B. Monitor holdings for absolute and relative performance  We do not use price targets
  16. 16. Portfolio Construction Broad Ensemble of Industry Dominant or Distinguished Companies (50-70 stocks) I. Drivers (3%-7% weight per stock) A. Deep knowledge of and strong conviction in the company B. Compelling risk return of the stock II. Core Positions (1.25%-3% weight per stock) A. Solid Companies B. Stocks have attractive risk return potential III. Incubators (<1.25% weight per stock) A. General inclination toward the stock B. Immature or speculative companies 16
  17. 17. Ownership Mentality Year First Purchased % by weight* % by count 2007 24 20 2008 13 9 2009 10 15 2010 15 21 2011 19 22 2012 10 13 *as of 12/31/2012. Cash was 9% by weight. 17  True long term investors  Know what we own and why we own it  Opportunity to know companies well over time
  18. 18. Our Primary Short Run Risks To Relative Performance I. Low and Increasing Market Dispersion* II. Speculative Bubble III. Junk Rally * We would like to acknowledge the influence of the Antti Petajisto, “Active Share and Mutual Fund Performance”, December 2010 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685942 18
  19. 19. General View of Risk I. To RAM Risk Is A Function Of1: A. The amount of money you stand to lose B. The likelihood of the loss occurring II. Greatest Source of Risk Is Ourselves III. To RAM Risk Is Not1: A. Price Volatility B. Beta, Correlation, Tracking Error etc… 1We would like to acknowledge the influence of the greater works of Seth Klarman 19
  20. 20. Managing Risk I. Simplified Investment Process1: A. Accentuates roll of skill versus luck in long run outcomes1 B. Anchored to Core Beliefs II. Limit AUM A. Wider spectrum of investable ideas B. Soft Close at $300M C. Hard Close at <$500M III. Check Lists1 A. Prior to Purchase B. Monitoring Existing Holdings IV. Maintain a log of various thoughts1 • oddly the most valuable log is “if we are wrong it will probably unfold like…”1 V. Active Introspection of Behavioral Biases and Cognitive Errors1 1We would like to acknowledge the influence of the greater works of Michael Mauboussin 20
  21. 21. Adaptation of Heisenberg Uncertainty Principal I. In our words: Measurement Perturbs • Werner Heisenberg concluded you cannot simultaneously precisely know both the location and speed of a particle, because to measure one perturbs the other II. Too frequently measuring the performance of a long term strategy perturbs the investment process… if you are human! III. We believe in the science behind our art IV. We grind through process, aware of performance 21
  22. 22. 22 Fee Structure1 Asset Amount Annual Fee Less than $50,000,000 1.00% Greater than $50,000,000 0.85% 1 Fees are negotiable
  23. 23. Investment Team R. Scott Redmond, CFA Jeremy Kirkland, CFA Tom Robertson, CFA  RAM  Founder  Small Cap Core Portfolio Manager & Lead Analyst  Lead Portfolio Manager  Small Cap Core Analyst  Portfolio Manager  Joined RAM in 2006  Small Cap Core Analyst  Portfolio Manager  Joined RAM in 2012  Experience  The Capital Management Corporation, 2002 – 2005  Director of Research  Portfolio Manager  Godsey & Gibb Associates, 1998 – 2002  Portfolio Manager, Research Analyst, Sales Associate  Financial Analyst at HCA Healthcare Inc.  Dynegy, Inc  Gardner & Robertson, President and Co-Owner  Anderson & Strudwick, served in various roles over 30 years: President, CEO, Director of Research, CCO, and CFO.  Education  Washington & Lee University BA Chemistry, 1994  Philadelphia College of Osteopathic Medicine, MS, 1996  Washington & Lee University BA Economics, 2002  University of Virginia B.S. Commerce, 1968 23
  24. 24. Operations Team Jamie Alexander Margaret Phillips RAM  CCO, Marketing, Trading, Operations  Joined RAM in 2010  Client Service, Trading, Operations  Joined RAM in 2012 Experience  Analyst at StreetAccount, LLC, Jackson Hole, WY – 3 yrs.  A subscription based financial news website.  Jackson State Bank & Trust, Jackson Hole, WY – 1 yr.  Accounting and Commercial Loan Support  Gardner & Robertson  Anderson & Strudwick  Legg Mason  Davenport & Company Education  University of Virginia  BA History, 2005  University of Virginia  BA Anthropology, 1980 24
  25. 25. Third-Party Relationships and Services Custodians Legal Support GIPS Verification Critical Software  BB&T  Charles Schwab  Fidelity  Merrill Lynch  Sterne Agee  SunTrust  TD Ameritrade  Wells Fargo  Christian & Barton, LLP  Alpha Performance Verification Services  Thomson Reuters  Captools  Microsoft 365 Sub-Advisory and Wrap Program Relationships Compliance  GARP Strategy offered via Merrill Lynch Managed Account Service (MAS)  RAM’s GARP Strategy is offered via Sterne Agee Investment Advisor, Inc. and via a model portfolio to a local money manager.  RAM provides equity portfolio management services to a local money manager.  ACA Compliance 25
  26. 26. 26 Redmond Asset Management, LLC Small Cap Composite 1 January 2007 through 31 December 2012 Year End Composite Gross Return (%) Composite Net-of-Fee Return (%) Benchmark Return (%) Composite 3-Yr St Dev (%) Benchmark 3-Yr St Dev (%) Internal Dispersion (%) Number of Portfolios Composite Assets ($ M) Firm Assets ($ M) 2007 4.1 3.1 -1.6 n/a n/a n/a ≤ 5 0.40 34.2 2008 -46.4 -47.0 -33.7 n/a n/a n/a ≤ 5 0.21 39.4 2009 45.4 44.0 27.2 33.9 25.2 n/a ≤ 5 0.31 79.6 2010 33.7 32.4 26.9 36.7 28.1 n/a ≤ 5 0.41 100.9 2011 -0.6 -1.6 -4.2 30.7 25.4 n/a ≤ 5 0.41 119.7 2012 22.4 21.2 16.4 20.5 20.5 n/a ≤ 5 0.50 154.5 Redmond Asset Management, LLC (referred to as RAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. RAM has been independently verified for the periods 1 January 2007 through 31 December 2010. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The Small Cap composite has been examined for the periods 1 January 2007 through 31 December 2010. The verification and performance examination reports are available upon request. Notes: 1 Redmond Asset Management, LLC is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on 12/22/2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors. The firm is wholly owned by the founding principal, R. Scott Redmond, CFA. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. 2 The Small Cap Composite includes all discretionary portfolios that are managed according to RAM's Small Cap investment strategy. The strategy uses a bottom-up stock selection approach to identify fifty to seventy small capitalization companies with high quality management teams, industry and/or niche dominance, with historical and continuing high returns on invested capital and reinvested cash. The firm defines small cap companies as those with market capitalizations less than $2 billion, or those companies with market capitalizations no larger than the most recently reported market capitalization of the largest constituent of the Russell 2000 Index. There is no account minimum restriction for the composite. 3 The performance benchmark for the composite is the total return of the Russell 2000® Index, as reported by Russell Investments. The composite returns may be significantly more or less volatile than the benchmark returns. 4 Valuations are computed and performance is reported in U.S. dollars. 5 Composite Gross Returns are presented before management and custodial fees but after all trading expenses. Composite Net-of-Fees Returns are presented after all custodial fees, trading expenses and management fees. Net-of-fee returns are calculated using actual management fees, which are accrued on a quarterly basis. Composite and benchmark returns are presented gross of withholding taxes except for foreign tax withholding on ADR securities. The standard fee schedule for the composite is 1.00% on the first $50 million. Fees are negotiable. 6 This composite was created in June 2009. A list of composite descriptions is available upon request. 7 R. Scott Redmond, CFA has served as the lead portfolio manager of the small cap strategy since inception. In July 2012, RAM hired Tom Robertson, CFA who now serves as an analyst for the Small Cap strategy and manages our new Growth at a Reasonable Price “GARP” strategy. RAM’s total firm assets increased significantly because many of Tom’s existing clients transferred with him. 8 The three-year annualized standard deviation measures the variability of the composite gross returns and the benchmark returns over the preceding 36-month period. The three-year annualized standard deviation is not presented for 2007 and 2008 because the composite did not yet have 36 monthly returns as of that date. 9 RAM has adopted a significant cash flow policy for the Small Cap Core Composite. When an external cash flow exceeds 10% of an account's value, that cash flow is segregated into a temporary account until the funds are invested according to the composite strategy or disbursed.
  27. 27. Appendix: Current Business Overview 27 $160 Million AUM Classification Small Cap Mid Cap Large Cap Fixed Income Normal Ranges $30 - 45M $35 – 50M $50 – 80M $5 -15M Account Types Small Cap Product All Cap and Balanced Separately Managed Accounts (primarily HNW individuals with a personal connection to a RAM employee*) < $1M $159M SMA Product Individually Tailored SMAs GARP Model *Stable and Enduring Business *RAM and its employees are under no financial pressure; we can be patient! Resource Allocation SALES AND MARKETING through 2012 HNW - primarily by word of mouth - 95% Small Cap Databases after 2012 Small Cap Core Product - 100% Past, Present and and Future RESEARCH Small Cap 50 - 60% Mid Cap 20 - 30% Large Cap 20 - 30% Fixed Income 1 - 3%
  28. 28. 28 Disclaimers  Past performance is no guarantee of future results.  Information provided in this brochure is for educational and illustrative purposes only and should not be construed as individualized investment advice. We recognize that each client’s investment needs and goals are different, and that the investments or strategies discussed herein may not be suitable for all investors. Any opinions or estimates contained in this brochure constitute the judgment of Redmond Asset Management, LLC (RAM) as of this date (December 31, 2012) and are subject to change without notice.
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