Informed Investor Signals
Monteagle Informed Investor Fund
US > Large-Cap > Growth
Jan 04, 2010
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Inception Date
Aug 04, 2009
Q: What is the background of the fund?
A : Monteagle Informed Investor Fund, which was launched in April 2008, is one of six funds managed by Monteagle Funds. To achieve its investment objective the management of the company has appointed Nashville Capital Corporation of Tennessee as Advisers to the fund, which is also sub-advised by T.H. Fitzgerald & Co based in Hartford, Connecticut.
Q: What are the fund’s investment objectives?
A : The fund’s main investment objective is long-term capital appreciation. The investment strategy that we exploit is organized around identifying “informed investors” and our selection of domestic stocks, primarily in the mid- to large-cap range, based on growth measures. In the long term we are seeking to invest in companies that are expected to grow faster than the market.
Q: What is the fund’s principal investment strategy and what do the words “informed investor” stand for in the name?
A : The fund seeks to achieve its objective by investing in “growth stocks”, companies that demonstrate accelerating cash flows, profit margins and revenues.
The words “informed investor” mean that some of the investors of our portfolio holdings are people from the senior corporate management of the company or large outside institutional investors or the company repurchasing the stocks in open market. These groups of investors are better informed about the businesses they manage or invest in. But that is not always the case, many a times insiders tend to believe their own projections.
So, the investment strategy begins with a careful detailed identification of informed investor ownership or buying interest which can be gathered from regulatory filings with the SEC.
Not a single stock is considered for research unless it meets this inviolable first-screen requirement. Those stocks that qualify are then analyzed for the quality and magnitude of past earnings growth and the projected growth rate.
In addition, when there is lot of volatility in the market the fund’s strategy is to minimize losses within this broad framework.
Q: What has been the fund’s performance since inception?
A : Over the course of this past year it was found that only a limited number of companies met this ‘Informed Investors’ criteria for investment purposes. This coupled with the chaotic market conditions and a rapid decline in the major indexes led the firm to come to a decision to utilize a portion of the fund’s assets in Exchange-Traded Funds for an extended period of time. It was this decision that enhanced the fund’s performance during this past year.
As of September 30, 2009, the fund had an annualized total return of 22.59% against a loss of 13.97% for S&P 500 with dividends and a loss of 10.69% for the Russell 1000 Growth Index since the fund’s inception on April 3, 2008.
Q: What are the underpinnings of your investment strategy?
A : During the bear market of 1973 and 1974 one of our consulting clients suffered heavy losses in their portfolios. At the time we were asked for investment strategies that have worked over a long periods of time and can generate stable and consistent returns.
We recommended four strategies that focused on growth, market value, private equity value and investments based on select insiders and informed investors. At the time client invested $20 million in each of the four strategies.
The informed investor strategy generated 26% returns beating the 14% returns generated by all three other strategies. This was in 1982 and ever since we have had belief in the strength of this strategy.
Q: Based on this strategy, how do you go about the research process?
A : We begin our research process with the insider activities monitoring which generally gives us 600 companies to start with. Through the initial screen of select investors and their activities we identify companies that meet our investment criteria. Then we apply three more screens.
First we look at historical earnings and expected earnings. Second we check the projected earnings growth and evaluate sustainability of the earnings and competitive dynamics and expected earnings growth in the future. We develop reliable estimate of earnings. We are interested in companies that have reliable and sustainable earnings and growth trend.
Third we assess the stock price and determine if the future earnings expectations are already reflected in the price. We want to make sure that we are not the last one to know what the market has already discounted.
To do this, we have a couple of measurement tools of our own. We measure companies’ value based on price to book value and price to sales and other issues that are related to margins. We also have our own proprietary measures like ‘First Cut Earnings Revision’ for earnings analysis and the ‘First Cut Value’ which takes into consideration productivity, margins and issues that relate to the pricing of the company.
Q: Is there any market cap limitation to the portfolio?
A : No. Our investment strategy is a multi-cap strategy. We can buy Amzon.com and Apple and also some lesser known stocks. But we do not have to buy every stock that is out there.
If a stock comes up on our screen and if we don’t see any analyst estimates for that company we drop that stock from our universe. So, it is quite possible that we may miss few small cap companies. We will not consider investing in a company if there is no stock following from analyst community.
Q: Why do you feel informed investor information is important?
A : Insiders understand their companies much better than outsiders, and that is why managers and directors of companies know best about their companies’ prospects for growth. Wall Street analysts will certainly not have all the information that these informed investors may have. In the event such persons are seen investing in their company stocks is a clear vote of confidence that no other action can match. We prefer to put our faith in the actions of people who are closer to the business than others.
Q: What is your buy-and-sell discipline?
A : The buy discipline is to look at the insider buy, then analyzing the earnings outlook to see whether they are on track for growth and then after ascertaining that we are not late in the growth curve, initiate the buying process after analyzing the investor sentiment.
We sell stocks when they fall after we purchase them. If the stock falls 8% we sell one third of the holding, if it drops to 10% we sell another third and if it falls to 12% than we sell the entire holding.
At the other end we have exit strategy called ‘Holding High Rule.’ If the stock value declines 12% from its high we sell a third of the weight, sell another third if it drops 14% and sell the rest if it drops 16%. In special cases where the stocks have had a great run we may do this at 14%, 16% and 18% but such case are very few.
Q: Sometimes this exit strategy may also fail. How would you react to that?
A : No strategy is fail-safe. When one chooses a strategy, all the pros and cons are analyzed and the strategy is chosen with the conscious knowledge that it could fail sometimes. That’s fine as long as it works most of the times.
We had a position in Ashland Chemicals where we had every parameter we wanted but when we bought into the stock it collapsed. So, we adapted the exit strategy and sold it but it has come back strongly giving us an indication that a little patience would have helped. We had a great run in Green Mountain Coffee Roasters Inc. We had a 53% gain in this stock when it fell off its high and then we exited out. As soon as we exited they came out with a profit growth 30% and then peaked and bottomed out again. We accept that as part of the process.
Q: How many portfolio holdings do you have and what is the maximum weighting?
A : In a typically normal market cycle our positions range from 25 to 35 stocks. The weightings vary from 3% to 5%. Right now we are 91% invested in ETFs and stocks.
Q: Can you give us the range of your cash positions?
A : At times cash positions have been as high as 65%, but we expect the average cash position to vary from 4% to 6%.
Q: What is your benchmark?
A : We benchmark ourselves against the S&P 500 and the Russell 1000 Growth index.
Q: At the portfolio level, what kinds of risks do you identify and how do you mitigate them?
A : In general, every growth strategy tends to do well over a long period of time and so volatility in the market is something one cannot avoid. One cannot handle volatility but we pay a lot of attention to the companies we invest in. Our stock selection process based on informed investors screening avoids us from many risks that are out in the market. And, our exit strategy also prevents us from losing large parts of our gains or principal.
We do not try to guess the market, not make assumptions because they can be very expensive.
We do not define the risk as the concentration in a sector but it is the inappropriate timing of our purchases. We rely on our stop loss triggers to act as one of our risk control measures.
Annual Return
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