AJS Capital Management,LLC - Portfolio Management & Thematic Investment Strategies

Equity Outlook


Equity Investment Philosophy

The following tenets comprise the core, fundamental beliefs that guide the equity investment process at AJS Capital Management. Currently, we offer one strategy, U.S. Equity All Cap Core. Short-term trading tactics, short sales, margin transactions, and option writing are utilized at the descretion of the manager.

Performance derives from exploiting mispriced securities.

The key to investment performance is finding and exploiting market inefficiencies in the form of mispriced securities. There are two components to this. One component involves determining the fair price of securities in the form of underlying intrinsic value. We calculate intrinsic value using any and all tools available to us including discounting cash flows, comparing to similar companies, and determining liquidation and asset values, among others. We believe that while mispricings do occur in the market, security prices eventually migrate back to their intrinsic values over longer periods of time and this “migration” can be exploited.

The second component of exploiting mispriced securities is establishing a clear understanding as to the various mechanisms at work that allow mispricing to occur. By understanding the mechanisms and motivations of the marginal buyer and seller, we believe we can more accurately estimate the probabilities and expected values of investment opportunities.

Nobody has perfect information.

In the early days of professional investment management, there were relatively few people conducting research on companies and industries and those that were derived an important advantage from doing so. Important asymmetries in information existed. Over the ensuing years, competitive pressure and technological development have conspired to make most data and analysis commodities which no longer provide a meaningful competitive advantage. What can provide an advantage, however, is how that information is used and how it gets interpreted in making investment decisions. Indeed, research shows that a common explanation of Chief Investment Officers for market liquidity is not differential information, but disparities in interpretation.

The information that enters a research organization enters in many forms—numbers, data points, summaries, stories, reports, interviews, editorials, etc. In order to convert the raw material of information into the useful output of a good investment decision, it is necessary to assimilate and synthesize the information into some meaningful form. We believe the most effective way to accomplish this is to thoughtfully deploy resources available according to the nature of the research tasks at hand. For example, we believe that “open-ended” issues that involve many available options are better suited to the mind of the expert investor who can quickly eliminate unproductive avenues of inquiry. Likewise, tasks that are well-defined and “programmable” are better suited to the discipline of quantitative tools.

Two other (interrelated) factors that affect information usage are research culture and research prioritization. We believe that the best research efforts are organized primarily around ideas and are comprised of analysts who are cognitively diverse. Further, we believe that the best way to leverage the collective knowledge and experience of a research team is to encourage active and open dialogue designed to explore multiple perspectives and to challenge individual assumptions, biases, and beliefs. Only by enduring such scrutiny do the best ideas rise to the top. In order to fully leverage these ideas, we believe research efforts must be dynamic and flexible in allocating resources such that ideas receive attention in proportion to the expected benefit to the portfolio.

Execution is crucial for investment success.

A good investment strategy is a necessary, but not sufficient condition for superior investment performance. In order to create value, that strategy needs to be implemented continuously and comprehensively. Actions speak louder than words. We believe the most effective efforts focus on a few simple, but key concepts that work to ensure proper execution of a firm’s investment strategy and to mitigate forces that may work against proper execution.

The first key to execution is structural in nature and involves a firm’s independence. By maintaining independent ownership, an investment firm eliminates agency effects which can present a conflict of interest between clients and certain of its ownership groups. The most common manifestation of agency effects in money management firms occurs when certain owners of the firm desire short-term growth delivered through asset accumulation and that accumulation makes it progressively more difficult to generate superior investment performance for existing clients. Independent ownership ensures that client and manager interests are optimally aligned. In fact, independence is regarded by some industry veterans as a competitive advantage.

Another key to execution is behavioral in nature. Many of the best investment decisions are the most difficult to make because of high levels of uncertainty and/or because such decisions are well outside the boundaries of conventional thinking. These types of situations are very difficult for most people. The best investors tend to have a temperament that provides them the courage and initiative to act, often going against the grain, when opportunities arise. However, the same temperament provides balance such that decision making is not simply a risk-taking activity, but a very conscious and targeted effort to engage in propositions with high risk-adjusted expected returns.

Finally, another important element of execution is simply doing what you say you do in your investment process. Too often, perfectly acceptable investment processes fail when actual investment activities bear little resemblance to the process described in the marketing presentation. We call this the “marketing gap;” the difference between what is said and what is done. Execution is optimized when the marketing gap is minimized.

* All research is provided from a third party provider and is not the opinion of AJS Capital Management. Research is provided for informational purposes and is not a solicitation for investment by AJS Capital Management. Before acting on such advise, one should discuss it's suitability for his or her investment goals. 

Contact Us: research@ajs-capital.com