- Introduction
- Features
- Differences from Other Kailash products
- Performance
- Conclusions
- Exhibits
- Appendix: User’s Manual for the Kailash Interactive Rankings Tool
Introduction
We are pleased to introduce the new Kailash Capital (“Kailash”) Large Cap Rankings Tool. For new clients who are unfamiliar with the Kailash approach to assessing stocks, it may be worth a high-level explanation of the process and approach Kailash uses to rank the stocks within the R1000 universe. After verifying and validating the underlying data, the Kailash Large Cap Rankings Tool assesses and compares each stock using the factors known for that stock and uses sophisticated algorithms to compare the qualities of a company across multiple dimensions against the rest of the companies in the R1000 index to ultimately arrive at a relative ranking of aggregate attractiveness for each stock in the index. The most attractive stocks are at the top of the rankings and the least attractive stocks are at the bottom. While details for many of the fundamental factors considered in the screening process are shown, users should be mindful that much of the process’s strength stems from the dynamic interaction of these fundamental variables.
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Overall, the Kailash products like quality. The objective in designing the approach was to find undiscovered value by ferreting out atypically high-quality businesses for their level of relative valuation. There’s an old saying in the industry that “a growth investor studies the income statement, glances at the balance sheet and forgets valuation while a value investor starts with valuation, studies the balance sheet and looks at the income statement.” The Kailash methodology works with the knowledge that there is excellence in both approaches, and the Large Cap Rankings Tool works to dynamically compare the relative attractiveness of stocks with growth or value characteristics. Depending on market conditions, at times value stocks may be over-represented in the top ranked stocks, but at other times growth stocks could be better represented. Generally speaking the models avoid popular fast growth stocks.
In an ideal world, the fundamental process would produce nothing but inexpensive, fast growing companies with vaults for balance sheets, income statements and cash flow metrics that point to conservative accounting, track records of consistently efficient cash deployment, and idiosyncratic price action that reflects an improving market opinion of the company. Unfortunately, all of these factors rarely, if ever, coalesce. Unlike traditional quantitative models which often begin and end in either value or momentum, the Kailash process works backward, assessing quality across dozens of metrics and then favoring shares whose quality may be mispriced. We believe this approach closely mirrors the process pursued by most fundamental investors who seek to arbitrage their incremental units of knowledge from their detailed study of fundamentals against the publicly recognized valuation and price.
In practical terms, the Large Cap Rankings Tool compares the relative merits of every company in the Russell 1000 Index with every other company. A great investor once said “The investor who wins is the one who turns over the most rocks.” We agree emphatically and believe the Kailash approach excels at turning over all of the “rocks” in the R1000 universe at once. Our objective is to maximize efficiency and minimize the time clients spend sifting through stocks that appear inexpensive, but are of low quality or represent overpriced growth. We believe that shopping in the “right neighborhood” or fishing in an “attractive pond” is the most effective method to optimize clients’ time, amplify their abilities as portfolio managers and increase their chances of finding stocks accretive to their shareholders’ returns.
As always, we appreciate the support given to us by each of our clients. We would be happy to answer any questions that existing or prospective new clients may have about the new Kailash Large Cap Rankings Tool or any of the other Kailash products.
