April 4, 2011

2011 SMA Manager of the Year, Large-Cap Core: Cornerstone

Cornerstone Investment Partners' Concentrated Equity Portfolio: Finding fair value

Large-Cap Core 2011 SMA Manager of the Year

Cornerstone Investment Partners

Concentrated Equity Portfolio

Throughout the month of April, AdvisorOne will focus on separately managed accounts: the money manager options advisors have, the platforms through which they can gain access to those managers, how they can conduct due diligence on those managers, and how advisors are using SMAs in client portfolios.

We begin our coverage by presenting the Investment Advisor-Prima Capital seventh annual Separately Managed Account Managers of the Year. In a feature article in the April 2011 issue of Investment Advisor, seven managers in six different asset classes were chosen as "A Class Apart."

In this article, we focus on Atlanta-based Cornerstone Investment Partners' Concentrated Equity Portfolio.

The philosophy: A bottom-up approach, conducting fundamental research on those stocks identified as trading at the deepest discount to their fair value.

The portfolio: Limited to 30 stocks, each of which the managers believe has a direct impact on portfolio performance

The performance: 
2010 performance figures (company supplied).

Gross returns: 13.10%

Net returns: 12.64%

S&P 500: 15.06%

Assets in strategy: $973.5 million

Percent of firm's assets in strategy: 40.7%

The peopleInvestment Advisor Editor John Sullivan spoke in March with Rick van Nostrand, portfolio manager. Team members are Fred Wetzel, Jr., CFA, partner and architect of Cornerstone's Fair Value model; Cornerstone's CIO is John Campbell, CFA. Portfolio managers are Neilson Brown, Dean Morris and Cameron Clement.

The Follow-Up: AdvisorOne readers are invited to register for a free trial of PrimaGuide Plus, Prima Capital's online research tool.

John Campbell, CIO, Cornerstone Investment Partners

Large-Cap Core Award
Cornerstone Investment Partners
Concentrated Equity Portfolio

"Information is a commodity,” says portfolio manager Rick van Nostrand, when asked about the investment philosophy of Cornerstone Investment Partners. “We don’t try to out-research the market. Rather, we adjust for investor behavior and exploit price/intrinsic value ratios with 30 solid stocks in our portfolio. When the behavioral gap ‘snaps back,’ we’re rewarded.”

Of course, not “out-researching” the market doesn’t mean they don’t perform proper company due diligence, something for which the Atlanta-based company is particularly proud. It’s that they believe the market to be efficient, and would rather rely on the predictable irrationality of their fellow investors.

The employee-owned make-up of the firm gives each member a vested interest in doing right by the client, with the majority of ownership in the hands of the eight member investment team, in order to ensure they’re properly incentivized.
The team, whose members average 28 years of portfolio management expertise, conducts fundamental research to identify characteristics that enable a company to achieve long-term profitability and to ensure those qualities are repeatable. They include quality of management, patents, products, distribution, culture and brand value.

“We keep the portfolio limited to 30 stocks to ensure each has a direct impact on portfolio performance,” van Nostrand says. “Some of our competitors have 50 or 60 stocks in their portfolio; that completely dilutes their performance. It doesn’t make sense to us.”

The firm also looks to include those names with the greatest margin of safety and the greatest chance of achieving fair value. Industry and sector weightings are strictly an outgrowth of the firm’s bottom-up stock selection process.

In choosing Cornerstone as this year’s winner, Prima noted the firm uses a fair value model that screens a universe of approximately 800 large-cap stocks to find which stocks are trading at a discount to Cornerstone’s fair value estimate. Cornerstone then looks at which stocks are trading at the deepest discount to their fair value and conducts fundamental research on those names. The firm spends all of its time researching these stocks and works to understand why the stock is cheap since the fundamentals are strong. When researching a name the team focuses its time on understanding the current operating environment, dissecting the company’s business model and financial statements, assessing its competition, and studying the management team.

Cornerstone then builds a portfolio with its highest conviction names and will trim or sell a position once it meets its fair value, or if the manager finds a better opportunity.

Overall, Prima believed Cornerstone was a strong candidate for the large-cap core SMA award due to its clearly defined and repeatable investment process, strong risk-adjusted returns and consistent exposure to the large-cap asset class.

The investment team consists of John Campbell, chief investment officer; Edward Mitchell, Jr., managing partner, portfolio manager; Fred Wetzel, Jr., portfolio manager; Neilson Brown, portfolio manager; Rick van Nostrand, portfolio manager; Dean Morris, portfolio manager; and Cameron Clement, portfolio manager.

This is an updated version of the profile that appeared in the April 2011 issue of Investment Advisor; Read the complete SMA Managers of the Year article here.

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