Investment Philosophy & Strategy Statement
Market Philosophy
Scrub Oak Capital operates on the principle that financial markets are not always efficient. Inefficiencies arise from government intervention, speculative behavior, interest rate imbalances, and natural deviations from fair pricing. These conditions create opportunities to capitalize on discrepancies between an asset’s market price and intrinsic value. By navigating these dynamics with discipline and responsibility, we aim to generate excess returns while contributing to the market’s price discovery process.
Portfolio Strategy
Our portfolio strategy is built on disciplined global security selection, supported by years of thorough due diligence before initiating positions. We focus primarily on equity securities, using long and short strategies to exploit market inefficiencies.
Long Portfolio: Intentionally concentrated, with an average position size exceeding 5%.
Short Portfolio: Diversified, with a maximum position size of 4%.
We may employ modest leverage to enhance returns during periods of pronounced mispricing, though total gross exposure is capped at 180%. Under neutral market conditions, our target allocation is 100% long and 50% short, with a portfolio beta of 0.5 or less. This strategic balance positions us to manage risk effectively while delivering consistent performance across diverse market environments.
Investment Process
We take a comprehensive approach to identifying opportunities.
Top-Down Analysis: We begin by analyzing macroeconomic factors, such as demographics, geopolitics, sector heat mapping, and valuation screens, to narrow a global investable universe of approximately 50,000 equities.
Bottom-Up Research: Next, we conduct detailed fundamental and competitive analysis, including free cash flow forecasting over the next decade and assessing capital returns, with a preference for share buybacks.
This dual-layered process ensures that every investment aligns with our high-conviction, long-term strategy.
Portfolio Turnover
Our disciplined turnover approach reflects our conviction-based strategy:
Long Positions: Annual turnover is targeted at 25% or less, emphasizing patient, high-conviction investments.
Short Positions: Turnover is inherently higher, adjusting dynamically to market conditions to balance tactical opportunities and risk.
Risk Management
In addition to pursuing excess returns, risk management is a cornerstone of our strategy.
Systematic Risk Mitigation: Our portfolio design inherently hedges against most market risks.
Volatility Management: The diversified short book balances low-volatility positions with higher-risk opportunities to manage portfolio stability.
Due Diligence Discipline: Extended gestation periods for new investments minimize errors and reduce emotional trading.
We maintain a flexible, adaptive mindset, ready to adjust intrinsic value assessments as new information emerges. Strategic hedging, disciplined portfolio construction, and intellectual humility underpin a robust risk management framework, supporting our goals of strong risk-adjusted returns and significant outperformance of the broader market.