Large Cap Fundamental Value

Investment Philosophy & Process


H&W employs a research-driven, fundamental value investing approach. We invest in companies where, in our opinion, the present value of its future cash flows exceeds the market price. These opportunities often emerge because the market extrapolates current trends into the future, which leads to favoring popular investments and shunning others—regardless of valuation. Empirical evidence suggests that companies generating above average returns on capital attract competition that leads to lower levels of profitability. Conversely, capital leaves depressed areas, often allowing profitability to revert back to normal levels. The difference between a company's price based on an extrapolation of current trends and a more likely reversion to mean creates the value investment opportunity.

To uncover these opportunities, we employ a disciplined, bottom-up investment process emphasizing rigorous, internally-generated fundamental research. We believe the consistent application and depth of our independent research can maximize the tradeoff between value and risk providing superior returns to a static benchmark over the long term.


H&W subscribes to a team-oriented, five-stage process. The goal is to employ a consistent, repeatable approach and create a diversified portfolio that exhibits attractive risk/return characteristics.

1. Idea Generation Identify investment candidates and prepare initial review Entire Team
2. In-Depth Evaluation Prepare detailed assessment of investment opportunity Analysts
3. Recommendation Review analysis, assess risk/return profile Analysts/Sector Teams
4. Portfolio Construction   Buy, sell, and monitor Portfolio Managers
5. Portfolio Review Assess portfolio positioning and macro exposures Entire Team

1. Idea Generation
We source investment ideas from screens of financial databases and from our investment team.

  • Financial Database Screens
    We use dynamic and flexible quantitative screens designed to filter a large universe of securities to identify those that appear to have attractive risk/reward characteristics. These screens evaluate similar risk and valuation criteria, but can be tailored for specific sectors/industries to emphasize the most relevant factors.
  • Investment Team
    We augment our quantitative screens with ideas sourced from our Analysts and Portfolio Managers. Based on their industry knowledge, contacts, experience, and discussions within the Sector Teams, our investment team identifies opportunities that automated screens can miss due to data issues or other limitations inherent with screens.

Once investment ideas are generated, an initial review is conducted to highlight the key investment merits and risks, verify the validity of the characteristics that attracted us to the security in the first place, identify any obvious issues/warning signs that need to be addressed, and provide a rough estimate of the risk/return profile.

2. In-Depth Evaluation
The in-depth evaluation stage of the process is by far, the most rigorous and time-consuming. This stage involves detailed research at the industry, company, and security level.

  • Industry
    Analysts conduct industry research concentrated on determining long-run margins and returns on capital. We seek to understand the factors that influence changes in supply and demand in order to determine normal industry profitability. Competitive analysis, akin to a Porter’s Five Forces approach, is also evaluated to obtain a better understanding of industry risks. Our analysts accumulate a body of knowledge over years that enable them to respond to dynamic markets quickly.
  • Company
    Using the industry research as a backdrop, the Analyst conducts detailed fundamental research at the company level. We focus on the company’s long-run normal earnings power, which is the sustainable cash earnings of a company under equilibrium economic and competitive market conditions. Company analysis focuses on full cycle profitability, capital intensity, free cash flow and financial leverage. Analysts meet with company management to better understand the company’s business model by its various divisions, capital allocation policy, return potential of current capital programs, shareholder orientation, and overall competence.

    Next we do a risk assessment, which entails a variety of both financial and non-financial factors. We assess the company’s ability to survive temporary, short-term distress without impairing the long-term value of its franchise. This includes a review of its financial leverage, historical cash flow volatility, available liquidity, access to capital, exposure to extreme events, and unusual profit concentrations. To augment the risk evaluation process we have developed a red flags analysis, which is a list of questions that helps identify subtle but potentially meaningful risks. The ultimate goal is to identify attractively valued companies with acceptable risk profiles.

  • Security
    To quantify return potential, we employ an internally-developed, three-stage dividend discount model ("DDM"), using market-derived discount rates. The first stage uses explicit earnings projections for years one through five, which are derived from the Analyst's financial model. We assume that a company achieves normal earnings in year five. The second stage of the DDM reverts the company's returns to market averages over the next fifteen years. The third stage determines the terminal value of the stock. We determine the present value (price target) by discounting these values back at the cost of equity. Next the analyst provides a risk assessment highlighting critical issues that could affect the company and its stock price. Finally, the analyst summarizes the recommendation with an investment thesis and recommended weight.

3. Recommendation
Each step of the in-depth evaluation is subject to peer review. Peer review is organized through six Sector Teams composed of industry Analysts and dedicated peer reviewers. In addition to reviewing financial models and ensuring integrity/consistency, the reviewers play a devil’s advocate role to challenge the thesis and modeling assumptions. The primary objective is to solidify our belief in valuation and security risk. Sector Teams also consider macroeconomic trends and the potential effect on the portfolio. Once ideas are thoroughly vetted, the Analyst and Sector Team jointly recommend a target weight.

4. Portfolio Construction
We employ a bottom-up, risk-controlled portfolio construction process with the primary goal of generating attractive risk-adjusted returns. Portfolio Managers, who are embedded within the Sector Teams, assess recommendations within the context of the overall portfolio. They consider the relative attractiveness of opportunities and assess the complementary nature of new ideas with the existing portfolio. Portfolio Managers have responsibility for creating and maintaining a target portfolio for the investment strategy, generating trades and assuring compliance with client guidelines—buy, sell, and monitor.

5. Portfolio Review
The investment team interacts on an informal basis constantly, which is our most important means of communication. Quarterly, the entire investment team meets formally to discuss portfolio positioning and any macro events that could affect the portfolio. We discuss portfolio performance, trading activity, and economic/industry events. Team members are encouraged to voice any concerns or new ideas in this medium, whether it is security-specific or otherwise.