8/8/2019 Key Success Factors for Value Investing

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CIO InsIghts

2011 American Century Proprietary Holdings, Inc. All rights reserved.

FIRST QuaRTeR 2011

Non-FDIC InsrdMy Los VlNo Bnk G

Pillip n. Davido, CFA

Chie Investment OcerU.S. Value Equity

Fundamental bottom-up

company analysis is the

cornerstone to value investing

and requires understanding

a companys ability to sustain

an attractive long-term

rate o return.

Value-based investment strategies are sometimes perceived as old ashioned and lesscapable o long-term wealth generation than growth-based strategies. But historyespecially over the past ten yearsdemonstrates that a better analogy might be thetortoise (or value) versus the hare (or growth) where slower but steadier could be amore attractive approach or long-term investors.

to value managers. These are companieswhich seem inexpensive based on attractivevaluation multiples. But their underlyingundamentals usually reveal businessesin secular decline (e.g., newspaperpublishers) or broken business models(e.g., book retailers). The ability to avoid

value traps is probably one o the mostdistinguishing characteristics o successulvalue managers and refects a truism thatwhat you dont own in your portolio is asimportant as what you do own. Knowingwhen to buy and sell a good value companyis also crucial. We dont all in love withour investments and understand that evenhighly successul companies go throughperiods o over- and under-valuation.

Portolio construction is another crucial skillor successul value managers. Good valuemanagers understand the risks they aretaking and expect to be rewarded or theserisks based on superior insight and analysis.To use a baseball analogy, most valuemanagers look or a lot o singles versusswinging or the ences based on a handulo active bets. We believe a key successactor is to limit active risk and constructportolios with positive expected excessreturn but less volatility than the benchmark.

Finally, all these insights depend on havinga proven and disciplined investment processrun by seasoned proessionals acting as

a team. Along with deep experience, it isalso critical to strive or continuous processimprovement based on ongoing learning.And that depends on one nal hallmark oa successul value manager: Never becomeovercondent in the ace o a constantlychanging economic environment andnancial markets.

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One thing that distinguishes value-basedinvestment managers rom their growth-oriented peers is their strong ocus on thebalance sheets o companies in additionto earnings and cash fow. A holistic viewo balance sheet undamentals considersitems that dont necessarily appear (suchas operating leases or large retailers) butought to be actored into calculations ocapital structure and leverage. In the realworld, businesses o every kind encountersetbacks and unoreseen challenges. Whenthese impact sales and earnings, a healthybalance sheet is a strong oundation andsaety net or value investors.

As value managers, we generally avoidcompanies with high leverage. We look or

businesses with strong and sustainablebusiness models and value propositions, andwe avoid companies where managementhas madeor is makingpoor capitalallocation decisions. These points refecta undamental bias toward quality andsustainability. We are interested incompanies perormance over the entireeconomic cyclenot just how well they cando in the good times. Companies in highlycyclical industries can appear attractiveas their sales and earnings accelerate ina growth phase, but understanding their

perormance and value over their entireearnings cycle is what matters. Fundamentalbottom-up company analysis is thecornerstone to value investing and requiresunderstanding a companys ability to sustainan attractive long-term rate o return.

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Successul value managers are excellentstock pickers. Value traps are anathema

Ky Sccss Fctors for Vl Invsting

IN-FLY-70272 1101

The opinions expressed are those of Phillip N.Davidson, CFA, and are no guarantee of the futperformance of any American Century Investmeportfolio.

For educational use only. This information is notintended to serve as investment advice.