Wall Street Transcript Interview with Jerrold K. Senser, CEO and Chief Investment Officer of Institutional Capital: Seeking Stock-Specific and Thematic Catalysts in Large-Cap Value Investing

Wall Street Transcript

67 WALL STREET, New York - September 4, 2012 - The Wall Street Transcript has just published its Large-Cap Value Investing Strategies Report offering a timely portfolio management review for serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Large Cap Investing - Downside Protection - Value Investing - Risk Mitigation

Companies include: Staples, Inc. (SPLS), BB & T Corp. (BBT), Texas Instruments Inc. (TXN) and many others.

In the following excerpt from the Large-Cap Value Investing Strategies Report, the highly experienced portfolio manager of Insititutional Capital discusses his investment process:

TWST: You use a bottom-up approach to select stocks from the large-cap segment of the market. Have you noticed any trends as far as certain sectors being more likely recently to include the kinds of stocks Institutional Capital is looking for?

Mr. Senser: There have been wide performance divergences between various sectors of the market. The behavior in the second quarter was very similar to what we saw in the third quarter of last year and in 2008. There was deterioration in expectations about global economic growth and increased concern about financial conditions, particularly in Europe. As a result, investors looked for safety and security and moved toward more defensive sectors like utilities, staples and telecommunications. I think that has led to some pretty wide valuation disparities between different sectors.

TWST: Please tell us about how you find pricing efficiencies within the large-cap segment.

Mr. Senser: We believe that there are pricing inefficiencies in the large-cap sector of the market. Our investment process focuses on valuation and catalyst identification in order to exploit those perceived inefficiencies on a consistent basis. We also take a global perspective, which we feel is important in the large-cap area. Most of the companies we follow are multinational in nature, so it's important to have a perspective on their competitors outside the U.S.

Our equity selection process has not changed over time and involves three different stages. First, we try to identify best values. Our analysts divide the world into 14 different economic sectors and develop target prices for the approximately 1,100 stocks in our investment universe. Those targets reflect normalized earnings, or earnings that we would expect the company to be able to achieve over the course of an economic cycle. At this stage, we also try and eliminate value traps. Value managers often get into trouble by buying stocks that appear cheap, only to see the company's fundamental earnings power erode. To address this problem, we eliminate stocks where consensus earnings estimates are in decline. Overall, we look for stocks that we believe have at least 15% upside to their target price and have stable-to-rising consensus earnings estimates. This subset usually comprises about 20% of our investment universe, and in our view provides a very attractive group of stocks for further review.

The second stage of the process is catalyst identification. Here, we look for specific conditions or factors that potentially will change the market's perception about a stock and move it closer to its warranted target price. Stock-specific catalysts include management, restructurings, new products, problem-fixing situations and pricing flexibility.

In addition to stock-specific catalysts, there can be thematic catalysts that operate in the portfolio. Thematic catalysts are based on macroeconomic or general industry conditions. We believe the focus on catalysts provides several advantages to the portfolio. First, it's an important risk-control mechanism. If a catalyst erodes or is broken, we don't try and reconceptualize an investment idea. We generally sell the stock from the portfolio. Secondly, catalysts help highlight areas of inefficiency in the market that we can return to time and time again to find stocks that we believe have good potential.

The third and final stage in the investment process is portfolio construction. In this stage, the analysts present their ideas to the portfolio management team. The team evaluates the ideas and selects the most compelling stocks for the portfolio.

TWST: One of the firm's strategies is to avoid so-called value traps. Would you give us an example of a company that fell into that category, that looked attractive initially but has appeared to be a value trap upon further inspection?

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 and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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