The Bottom-Up Perspective

Terry Flanagan

Fund managers come in all shapes, sizes and strategies. Like the dichotomy between the bulls and the bears, an age-old debate between bottom-up investing and top-down investing still rages on.

“There more than one way to investment heaven,” said Mark Travis, chief executive and founder of Intrepid Capital Funds, which has 1.3 billion of assets in mutual fund and separately managed accounts. “We think we do a good job of preserving capital and participate in capital gains on the way up.”

Inspired by The Intelligent Investor, Travis utilizes a bottom-up approach to investing; using detailed fundamental analysis that aims to spot opportunities in the small cap equity and high yield debt markets—assets that have growth components, but also harbor risk. Travis acknowledges that current bearish investor sentiment has shifted power toward large cap equities, but his firm does “not add value in that area.”

To mitigate risks associated with his investment picks, Travis ensures his fund have “cash buffers.” Liquidity, mainly by holding a fistful of treasuries, provides flexibility in down markets, such as the rocky market swings of the past three weeks.

“We look at high volatility as an opportunity for someone else to make a mistake,” said Travis. “We’re actually more heavily invested than we were before starting three weeks ago. We have cash buffers, so our downside is covered.”

That “someone else,” may be the quantitative model-based shops that take a top-down approach, so divergent from that of Intrepid’s ways.

“Momentum investing, to me, seems like a giant game of musical chairs. Everyone is hoping to have a chair when the music stops, but there’s no underlying valuation. The quant shops buy high, hoping to sell high to a greater fool,” noted Travis, whose particular skills lie within selecting discounted securities, specifically those that trade less than 80 cents to a dollar.

“Investors like our underlying dynamics, such as private equity firms,” he noted. “We have conservative values.”

Related articles