Many asset managers emphasize their team-based approach, but few take this quite as literally as California-based Saratoga Research & Investment Management.
Of the 18 staff at the $2.2 billion large-cap manager, half played high school football together on a team coached by the firm’s founder and chief executive, Kevin Tanner.
This background makes for a collegiate culture and has helped the firm punch above its weight in terms of recruitment, according to Matt Casas, assistant portfolio manager on the firm’s flagship Saratoga Large Cap Quality strategy.
‘Not only is the football thing a cool story making for a cool culture, but it was a great way for Kevin to recruit the kind of people he otherwise may not have been able to,’ he said.
‘The other guys went to Harvard, Yale and I went to Vanderbilt and for a firm of our size to be able to recruit Ivy League talent, it’s hard.’
The firm is close-knit in another way too, with 15 of the 18 staff growing up within 30 miles of each other. That includes almost all of the nine members of the investment team, with the exception of one who is from Hong Kong.
The firm was founded in 1995 by brothers Kevin and Jim Tanner and manages money via separately managed accounts, unified managed accounts and one mutual fund it subadvises for former Citywire cover stars Beacon Pointe Advisors.
That fund, the $76.8 million Port Street Quality Growth fund, hit its three-year anniversary in March.
The firm has one investment process, which it delivers through two variations on the same strategy: the SaratogaRIM Large Cap Quality strategy, which has an unconstrained cash allocation, and the SaratogaRIM Large Cap Focus strategy, which is not allowed to hold less than 5% cash for risk-mitigation purposes.
If football feeds into their investment approach, then defense is very much the name of the game.
The process begins with a four-step screening methodology to narrow down an extensive list of large-cap companies. Thousands of securities are put through a five-factor quantitative screen that filters out companies likely to be hurt by deflationary or inflationary cycles and those with limited or diminishing profitability, while singling out those with a competitive advantage and efficient reinvestment of retained earnings.
Fewer than 300 securities are then left to pick from. These get narrowed down through subjective qualitative analysis that aims to figure out whether the profitability of a company is strong, provable, a product of competitive advantage and likely to persist, leaving around 75 names. These make up the firm’s bench, with between 25 and 45 names held in the portfolio.
The long game
Philosophically, the managers see themselves as value investors, but acknowledge that their strategy is usually categorized as growth or core.
The long-term strategy has a very low turnover rate, but there are some circumstances, such as a merger, in which a company may no longer meet the criteria of the portfolio, prompting the managers to sell.
Casas and his colleagues held Kellogg’s in their portfolio until the cereal giant decided to acquire Pringles in 2012. ‘We thought it was a really good strategic move because Pringles had a distribution network in China, which Kellogg did not, and we expected them to leverage that and get Kellogg products into that pipeline,’ Casas said.
‘But what Kellogg did was issue almost all debt to acquire Pringles, which was almost the same size as them. Issuing all of that debt put them over the maximum threshold in that first block of screens, so they were out.’
However, not all acquisitions are bad news. In 2015 the firm bought Precision Castparts, which manufactures components for aerospace and defense industries. Shortly afterwards it was acquired by Berkshire Hathaway.
‘It was very attractively priced and about a month after we bought it, Berkshire Hathaway bought it out. We made money but we were a little disappointed because we were valuing the company much higher and thought Buffett got a screaming deal,’ Casas said.
‘The flipside of that is that Buffett is a really big influence on this process and if you know Warren Buffett’s philosophy at all, it runs through here. It’s not identical but he is a heavy influence so that was an affirmation.’