Investment Process

TwoTalents Capital Management focuses on building tailored portfolios of individual stocks and bonds to meet the goals and objectives of the clients it serves. The first step is determining the proper asset allocation for your portfolio. We will utilize a risk tolerance questionnaire and engage in a detailed analysis and discussion of your specific situation and preferences to arrive at an appropriate allocation. We then apply our investment process to determine which specific investments are to be used in the portfolio.

At TwoTalents Capital, the process for equity valuation begins with a focus on quantitative measures to screen the universe of companies for potential investment candidates. The universe can be as narrow as a specific industry sub group or as broad as global markets. By applying various factors such as earnings and revenue growth, leverage, cash flow metrics, and price momentum, a list of companies for further review is created.

The next step is to drill deeper into the market expectations for a company by comparing value drivers such as sales growth, EBITDA margins, and asset turnover. Using the ValueExpectations™ software developed by Applied Finance Group (AFG) we can model out the trends and future growth expectations in those value drivers and calculate a company's economic margin and estimate intrinsic values for those companies. We define economic margin as simply a company's cash-on-cash return on investment, less the company's cost of capital.

All companies that we purchase should generate a positive economic margin; we call them "value-creating" companies. We favor companies that today, generate cash flow from their assets that exceeds their cost of capital. We also favor companies that are expected to show an improvement in next year's expected economic margin. The other buy criterion is a valuation factor. We seek companies that trade at a discount to intrinsic value by comparing the upside potential to intrinsic value with other companies in the same industry.

When all the quantitative analysis has been applied, a final application of fundamental judgment is utilized to justify the numbers being derived from the models. Quantitative factors include such elements as the company's business model, its competitive advantage, and the quality of management. We believe this detailed, multi-pronged approach to stock analysis helps us to determine the best companies for investment in client portfolios.

When the client's investment goals warrant the use of fixed income instruments (bonds), we utilize individual, high quality government, agency, corporate, and municipal bonds. With the anticipation of a rising interest rate environment, we currently build bond portfolios that are "laddered in maturities" (some bonds come due each year which can be re-invested at the prevailing rates) and with relatively short durations. In some instances, we may utilize low-cost, exchange traded funds to diversify bond holdings and access specialized sub-classes that provide some opportunities or risk mitigation benefits.