Bernard Horn has been investing in global equities since graduating from the Massachusetts Institute of Technology’s business school in 1980. Polaris Capital Management, his current fund, was founded in 1995 and recently reported about $4 billion under management.
Because of its global nature, Polaris has a particularly wide universe of stocks to invest in. Horn and his team like to narrow down the colossal number of publicly traded companies by using proprietary screening techniques to identify which ones have an attractive level of discretionary cash flow- cash flow from operations less maintenance capital expenditures- in relation to their market value. Polaris is a believer in the “margin of safety” argument for value investing, namely that avoiding large downside risk can be a driver of above-average returns, and companies trading at a low multiple of this discretionary cash flow figure will be similarly safe to those with low P/E or EV/EBITDA multiples. Beyond that point Polaris’s analysis becomes more qualitative, analyzing the company’s position as well as its financials.
Our analysis of the fund’s disclosed positions is that many of them tend to cluster in the $30 to $50 million range, and even the largest positions don’t have much more capital than that. As a result the portfolio is not particularly concentrated; in a way this is another conservative decision, with the fund’s fortunes being less dependent on any particular company. Changes in position size from quarter to quarter also appear very limited compared to many other funds. Here is a quick look at the five largest holdings in Polaris’s most recent 13F filing (see more of Horn's favorite stocks):
Infosys Ltd (NYSE:INFY). Infosys was the fund’s top pick, as it increased its holdings by 33%. The India-based business management and technology consulting company has a market capitalization of $25 billion, which is 14 times its trailing earnings. This is due to a 21% fall in the stock price over the last year despite the fact that revenue and earnings were up modestly in the third quarter compared to the same period in 2011. AQR Capital Management, managed by Cliff Asness, was buying the stock as well.