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Focused Equity

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Inception: August 1, 2011

Investment Philosophy

The Focused Equity Strategy utilizes a disciplined, fundamental bottom-up, valuation-based approach to investing. We seek to select companies that are inefficiently priced relative to their fundamental value, and earnings growth outlook and cash flow generation over the next three to five years. We look for a compelling valuation, attractive business model and experienced management.

Investment Process

The investment process includes in-depth internal research, enabling us to identify financially sound companies that offer solid growth prospects, while selling below what we believe is their intrinsic value. Ideas are generated from a variety of sources including industry publications, conferences, sell side research, screens, talking to industry leaders, SEC filings and competitors of existing ideas. Securities chosen for the Focused Equity portfolio are primarily U.S. equities with market capitalizations of $1 billion or greater.

We use a combination of quantitative screens and qualitative fundamental research to narrow the initial universe of approximately 1700 securities to the 30-35 securities typically held in the portfolio. We screen on the following quantitative metrics: Private transaction value, enterprise value/revenue, enterprise value/cash flow, free cash flow yield, prior trading valuation history, public company comparables, price/earnings, price/book value and sum-of-the parts.

In addition to quantitative measures, we look for companies with the following characteristics:

  • Industry leaders with a focused business plan and the ability to grow their market share
  • Proven, effective management

Portfolio Construction

Additional portfolio characteristics include:

  • Concentrated portfolio of 30-35 stocks
  • Sector weight maximum of 2.5x Russell 1000 Index
  • 8% maximum position per holding

Top Ten Holdings

as of December 31, 2016

  1. Twenty-First Century Fox
  2. Carnival Corporation
  3. Teradata Corporation
  4. FMC Corporation
  5. Discovery Communications
  6. Hewlett Packard Enterprise
  7. Kennametal
  8. BP PLC
  9. WalMart
  10. Baker Hughes Inc.

Manager

Thyra E. Zerhusen
CEO & Chief Investment Officer

  • Swiss Federal Institute of Technology, Diplom Ingenieur
  • University of Illinois, MA in Economics

38 years industry experience

Performance

Annualized
Returns (%) as of 12/31/2016 4Q 1YR 3YR 5YR SI
Fairpointe Focused Equity* 5.56 20.93 5.50 15.43 14.13
Russell 1000 Index 3.83 12.05 8.59 14.69 13.96
S&P 500 Index 3.82 11.96 8.87 14.66 13.10
Russell MidCap Index 3.21 13.80 7.92 14.72 12.33

*Net of Fees

Commentary

Focused Equity – 4Q 2016 Review

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Portfolio

as of December 31, 2016

Holdings By Sector

Sectors (GICS) % of
Portfolio
% of
Russell 1000
Consumer Discretion 26.9 12.5
Energy 11.2 7.2
Industrials 12.8 10.6
Materials 4.2 3.2
Consumer Staples 8.9 8.8
Information Technology 19.8 20.1
Telecommunication 0.0 2.6
Utilities 0.0 3.2
Real Estate 0.0 3.7
Financials 8.3 15.0
Health Care 5.8 13.1

Characteristics

  • P/E (forward 1-year) 17.2
  • EV/Sales 1.1
  • Long Term Debt/Capitalization 34%
  • ROE 5-year Average 15.0%
  • Average Mkt Cap ($mil) $32,486
  • Dividend Yield 1.8%
  • Turnover (annualized since inception) 33.0%
  • Total Top Ten Holdings 41.3%
  • The above information is based on a representative account.

DISCLOSURE
The Focused Equity Composite includes fully discretionary portfolios that invest in both mid and large cap equities, has 80% or more in equity holdings, has no more than 10% in short term duration fixed income instruments (2 years). Portfolios with low cost basis holdings will qualify as long as the total of those holdings are less than 10% of the total portfolio, are not on the FFE Approved List, and all other criteria are met. The Focused Equity composite represents portfolios that seek long-term total return through capital appreciation by investing primarily in both mid and large cap stocks. For comparison purposes the composite is measured against the Russell 1000, S&P 500, and Russell MidCap indices. The Russell 1000 is a market capitalization-weighted index made up of 1,000 large cap stocks that account for upwards of 90% of the market capitalization of companies traded in the U.S. The S&P 500 is a market value weighted total return index that represents the performance of 500 widely held large cap stocks held in the U.S. Securities market. The Russell MidCap is a market value weighted total return index that represents the midcap segment which measures the performance of the 800 smallest companies in the Russell 1000 index. The indices are representative of the types of equity assets invested by Fairpointe Capital LLC. Market indices are unmanaged and do not reflect the deduction of fees. You cannot invest in an Index and the performance of the Index does not represent the performance of any specific investment. The account minimum for the composite is $500,000.

Fairpointe Capital is an independent registered investment adviser.

The firm maintains compliant presentations and a complete list of composite descriptions which are both available upon request. Please send inquiries to mkatauskas@fairpointecapital.com or call 312-477-3300.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. Market, economic, company, and industry specific conditions are considered during the investment selection process. This was a period of generally rising security prices.

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all dividends, capital gains, and other earnings. Net of fee performance is calculated using actual fees.

Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.