Howard B. Aschwald, Portfolio Manager, Chief Investment Officer and Director of Research at Quantum Capital: a Focus on Economic Margin and Intrasector Comparisons

Wall Street Transcript

67 WALL STREET, New York - October 1, 2012 - The Wall Street Transcript has just published its Investing in Energy and Other Strategies Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Energy - Investing in Technology - Oil and Gas E&P - Value Investing

Companies include: Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), International Business Machine (IBM), Apple Inc. (AAPL), Trimble Navigation Ltd. (TRMB), Microsoft Corporation (MSFT) and many others.

In the following excerpt from the Investing in Energy and Other Strategies Report, an expert portfolio manager discusses his investment methodology:

TWST: You founded Quantum Capital. Is that right?

Mr. Aschwald: My Partner and I started the firm at the end of 1996. We got into the Schwab Advisor program fairly early, which was very good for our initial business, and this helped us grow. We started with a large-cap growth strategy, added a dividend growth strategy in 2002, then a midcap growth strategy in 2005. Finally, at the end of 2007, we created a hedged equity strategy.

TWST: The firm has different strategies but all of its accounts are individual accounts, not funds. Is that right?

Mr. Aschwald: They are separately managed accounts on different platforms, like Envestnet (ENV), Citibank (C), TD Ameritrade (AMTD) and Schwab's (SCHW) platform. Most of our accounts are with high net worth clients, where we have a relationship with the end user. However, our investment strategies are managed in the same way. The types of strategies and amount dedicated for each client allocation is customized for their unique circumstances.

TWST: Please tell us about the firm's investment philosophy.

Mr. Aschwald: There are two primary guiding principles for our firm. First of all, minimize losses. We like to take lower risk relative to our benchmark for all of our strategies. I feel that over the long run, investors make money by not losing so much of it in a downturn.

The other component is to have a way of looking at evaluating a company that is fundamentally different from the way other institutional investors are looking at things. I originally came from a more traditional research firm. We would estimate earnings, assign an appropriate p/e ratio, and then calculate a target price. A lot of people do that, and that's OK. There is nothing wrong with that, per se, but when a lot of people do something, it's kind of crowded, and it's really difficult to gain an extra edge. So I've been an early proponent of this concept called "economic margin."

When applied to the investment process, you are looking for companies that earn more than their cost of capital, in a nutshell. We are looking at how much true profit the company is making in relationship to their net invested capital. We project out economic margins into the future, discount them to the present, get an intrinsic value, and then we like to buy stocks at a discount to their intrinsic value. The important point is that this is a different way of evaluating stocks.

There is also a lot of good empirical evidence to support it, which is something else I am a very big believer of - using more evidence-based metrics in order to construct portfolios. It's the same process from strategy to strategy, whether we are using large-cap growth, dividend growth or midcap growth. They are managed the same way. It's just that the subuniverse of stocks changes depending on the strategy.

TWST: Quantum Capital has the hedged equity strategy as well, which seems a bit different than the other strategies.

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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