May 11, 2016

Market Neutral Investing With Gary DiCenzo of Cognios Capital

In this episode of Strategic Investor Radio, host Charley Wright interviews Cognios Capital CEO Gary DiCenzo. The two gentlemen discuss Cognios’s “ROTA ROME” investment methodology, which seeks the best companies in terms of Return On Tangible Assets (“ROTA”) and Return on Market-value Equity (“ROME”).

Why does Cognios think tangible assets are so important? DiCenzo explains that “good will” accounts for the majority of intangible assets, and that his firm has determined that “ROTA” is the best metric to find companies that make the most of their available resources. The “ROME” element is there to make sure the stock is trading at a good price at the particular time, because even good firms can be overpriced.

How confident is Cognios about the veracity of its ROTA numbers? DiCenzo explains that Cognios only invests in S&P 500 companies, and that he’s confident in the integrity of their data.

When Charley refers to Cognios as a “quantitative” operation, DiCenzo clarifies that his firm doesn’t use technical analysis, earnings momentum, and other such measures, but instead does a deep dive into company fundamentals. ROTA ROME provides the structure to comb through millions of pieces of fundamental data to find the best companies for the Cognios portfolio.

Cognios currently operates one ’40 Act mutual fund: the 5-star rated Cognios Market Neutral Large-Cap Fund (MUTF:COGMX), which is also available in institutional-class (MUTF:COGIX) shares with a $100,000 initial minimum investment. The fund’s investor-class shares, which have a $1,000 initial minimum, returned an annualized +7.20% for the three years ending April 30, 2015, ranking in the top 7% of their category.

The fund uses a “systematic, repeatable process” to isolate alpha – which, in DiCenzo’s view, is all investors should be willing to pay for. The fund is market-neutral with between 190-200% gross market exposure. The long portfolio normally consists of about 45 names with an overall beta of 1.0. The short portfolio is more diversified and more volatile, with a beta of around 1.5. To balance out the risks, Cognios invests around $1 long for every $0.66 sold short.

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