Investment Philosophy

The Three Peaks investment philosophy is derived from years of experience operating in the high yield asset class. Our time-tested investment philosophy has withstood many market and economic cycles by closely monitoring characteristics and trends within companies that not only have used the high yield market to propel growth such that it eventually led to positive credit events, but also those that faced bankruptcy and/or actually defaulted on creditors. We tend to focus our investments in industries that are mature in nature and have historically demonstrated the ability to support leverage throughout economic cycles. We then attempt to identify companies that have reasonably predictable revenue and cash flow traits and, more importantly, generate strong free cash flow. Our research team strives to uncover the intended use for free cash flow, as it can be paramount to a company’s future financial strength, credit profile and how its securities (bonds and stock) perform. The cornerstone of our philosophy is to identify companies with management teams that have a strong desire to repay debt and deleverage their balance sheet. Additionally, we place a high importance on those companies and specifically senior management teams that are communicative and willing to meet with and talk to bondholders and shareholders. In our opinion, there is no substitute for speaking directly with management.

Investment Strategies

The Three Peaks high yield strategy emphasizes total return while preserving capital. We believe our high yield strategy is generally perceived as conservative within the high yield asset class. We place a heavy emphasis on stability and consistency within the investment selection process, which we believe will provide reasonably stable and less volatile performance throughout various economic and market cycles. Bred out of our high yield strategy and associated research, the Three Peaks equity strategy emphasizes long-term capital appreciation from equity securities. We believe our credit-oriented focus is unique among equity strategies. We attempt to spot and exploit anomalies related to a company’s fundamentals or ability to become shareholder-friendly that may be overlooked by the equity market. Similar to the high yield bond strategy, we believe debt-repayment and deleveraging are very beneficial for the equity value of a given company. As such, there is a very high over-lap in the names owned in our high yield strategy and equity strategy. The Three Peaks equity strategy truly is a by-product of our high yield strategy and does not serve to dilute the activities of the investment team. Rather, we believe the dual focus actually strengthens and provides more balance to the investment process, as the fixed-income market and equity market will often factor in different variables related to a specific company, with each market separately weighing the significance of those variables.

Investment Process

We follow a large universe of companies, routinely reviewing earnings reports, corporate developments, trading activity and other data. Once an issuer has commanded our full attention, we look well beyond the standard published information, working with management to gain insight into the trends that affect financial development. We believe there is no substitute for speaking to management directly and as such we deploy significant resources in making numerous annual face-to-face visits. The data gathered from these meetings is crucial in helping our analysts build sound financial models. Once truly compelling ideas are identified, our team makes additional visits to gain a more complete understanding of factors guiding capital allocation decisions. Information is gathered from competitors, customers and suppliers, and further qualitative analysis is conducted. From there, detailed financial models are constructed, dissecting every significant element of a company’s financials. We then form various best-case to worst-case scenarios and conduct probability analysis, which in turn dictates whether an individual security is added to the portfolio.