Q:  How would you describe your investment philosophy?

A: All AIM growth portfolios share the philosophy of investing in companies which generate sustainable growth in earnings and cash flows that are not anticipated by the market. We seek those companies through fundamental analysis and proprietary quantitative research.

A key part of our philosophy is to remain objective. We use a balanced approach that does not focus on just one factor, but balances earnings, quality, and valuation. We’re not interested in opinions. We’re interested in the facts driving the fundamentals.

We're trying to achieve better risk-adjusted returns relative to our peers and we believe that the key to outperformance in our space is a better understanding of how to avoid risks. In many cases it is defense that wins. We do everything we can to avoid owning high-risk stocks, or stocks that have the potential for earnings disappointments, unsustainable growth, or are just too expensive.

We have screening tools that identify high-risk stocks with great accuracy, mostly tools which have been developed in-house and proprietary screenings. For example, we look at balance sheet metrics that show if inventory and accounts receivables become problematic, or if there is a divergence of growth in cash flow versus net income. More than 60% of the time companies that fall in these high-risk models underperform by levels of over 1,000 basis points on average.

Q: Would you define your universe? How many stocks belong to it?

A: Our universe is comprised of stocks with capitalization of more than $5 billion and growth rates of more than 10%. This comprises approximately 400 stocks. We’re a style-pure large-cap growth fund, so the vast majority of our assets are in companies with market caps over $14 billion.

Q:  Since a key part of your philosophy is avoiding stocks with risks not identified by the market, could you explain what you do to understand the risks ahead? For example, how does the news that Intel’s revenue will be below the forecast fit?

A: Our risk models are proactive and combine different factors. It’s not just cash flow or net income, but the combination of factors that makes the model powerful. We identify expensive companies that cannot sustain growth. These stocks are likely to underperform, and it's a predictive model.

We had no exposure to Intel because of our fundamental analysis. According to our internal earnings projections, estimates were too high. It also didn’t rank well on our screens.

The thrust of our fundamental research is challenging Wall Street’s assumptions to figure out what these companies can really earn. We own companies that rank well on our quantitative models and fundamentally, based on objective facts, have achievable or low earnings estimates. We maintain a disciplined approach with a focus on finding earnings discrepancies versus consensus expectations.

Q:  In terms of your strategy and process, can you explain what parameters you monitor and why?

A: We have a balanced, objective, and non-emotional approach. As we’ve discussed, we commence with risk models, eliminating high-risk stocks as potential portfolio candidates. In addition, we employ our quantitative screens, including examining earnings because we believe that earnings growth drives stock prices over the long term. We look at quality, which we measure in many different ways. We look at profitability measurements such as gross margins and balance sheet metrics. We look at capital use because managements decisions about how to deploy capital are very important. Is management shareholder friendly? Do they buy back stock? Do they raise or initiate dividends? Or, are they planning acquisitions that we know are deleterious to shareholders? We objectively look for both strong and sustainable growth.

Finally, we measure valuation. In our space, we've found that the most effective way to value companies is based upon cash flow measurements and, in particular, cash flow yield.

It’s a very balanced approach with multiple factors. We believe you need different factors to achieve consistent returns, because there are times when certain factors are ineffective.

The purpose of these screens is to remain fact-based, focusing on companies that will outperform. We’ve back-tested these factors, most of them for at least 20 years, and our model should outperform the market. We couple our buy and risk models together in order to narrow our universe. Then we do focused, fundamental research.

Fundamentally, we want to identify and understand the drivers of companies that can exceed expectations, not only because that's a positive catalyst to the stock price, but also because it’s a great defense against getting surprised on the downside.

We break down Wall Street’s models and assumptions about revenues, earnings, selling, general and administrative expenses, etc., and we challenge those assumptions and try to discover where they’re wrong. If we can say that a company's revenues are too low, based on a new product cycle, or margins are too conservative because of cost-cutting programs, that greatly reduces the chance of owning a company like Intel when it misses earnings estimates.

Q:  You said that it’s part of your DNA to avoid high-risk stocks. How do you define expensive stocks? Do you use historical or forward-looking earnings?

A: We mostly value our universe using free cash flow measurements, (based upon forward-looking numbers) historical free cash flow, and a company’s relative ranking to our universe. We also look at forward-looking Price/Earnings metrics, but to a lesser extent. Valuation is a component we consider in identifying certain high-risk stocks.