AMI Asset Management believes that in order to generate superior long term returns, a strategy must not only perform well in bull markets, but also maintain capital in bear markets. The firm strives to achieve this goal by utilizing a form of a GARP strategy which focuses on investing in companies with recurring revenue business models. The team defines recurring revenue business models as those with products and services that have a life span of less than two years, and thus must be replaced frequently. AMI believes that a recurring revenue business model allows a company to grow at a more predictable and sustainable rate and reduces volatility in their earnings.
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AMI looks for companies with consistent recurring revenue, sustainable growth prospects, strong cash flow, and healthy balance sheets. The firm performs all of its research in-house. The portfolio team believes that markets are efficient over the long term only, and that companies can go through extended periods of mispricing due to investor biases and other factors. The team’s rigorous internal due diligence process allows them to uncover these quality growth companies which they believe are undervalued. AMI also believes that good security selection depends on a portfolio manager’s ability to estimate the future growth of earnings. Given that predicting the future is difficult even in the best situations, the team prefers to focus on companies that have a more predictable business model.
Due to the recurring revenue requirement, the holdings of AMI’s equity strategies tend to be high quality and exhibit less cyclicality. This contributes to the strategies having lower standard deviations than their respective benchmarks. AMI has historically outperformed in down markets and would expect this to continue based upon our philosophy. Markets in which low quality, high beta names lead the way will typically be an environment where AMI’s strategies may lag. However, superior stock selection has helped AMI outperform in numerous up market cycles. AMI believes that the team’s focus on companies with recurring revenue is its most important source of value-add. Companies that exhibit recurring revenue business models have a solid base of business to grow from, and their salesforces do not need to regenerate revenue from scratch every quarter. In general, earnings of these types of firms are less volatile. AMI consistently sees sell side analysts, company management teams, and entire industries (software) tout recurring revenue models, but as far as the team knows AMI is the only manager to utilize this approach across its entire portfolio. The team also believes that the firm’s ability to look beyond the consensus and take a true long term approach is another source of value-add. AMI believes that most managers are too focused on generating near term upside only to lose capital in down markets.