Q: What is the history of the company?

The core members of our team came together in 2008 based on our Christian faith and a desire to work together offering a values-based mutual fund to the investing community. At that time, Finny Kuruvilla was having success managing private money using an investment methodology informed by Peter Lynch in a way that was coherent with faith and values. 

We started with a strict focus on avoiding businesses that we would not want to operate ourselves because investing in a business, ethically, is not very different from operating one. We believe that investment is ownership and we should be investing in companies that we would be comfortable operating.

Just before the onset of the financial crisis in 2008, we launched the fund to express our convictions on what we call “Values Based Investing.” Since then, we have launched an additional fund and we are ultimately looking to build out a family of funds. We feel our approach has been blessed and it has good applicability for both people of faith as well as the general public.

Q: What is the origin of the name Eventide? 

Eventide is an old English word that means ‘the coming of night.’ In addition to the poetic appeal of the word, we also like the connotation of stability. That said, we are not thinking of stability in terms of low volatility but in terms of buying companies that are doing well. There is certainly solidity in that, which is what we aim for.

Q: Would you dwell on the core beliefs that form your investment discipline? 

First of all, it is important to distinguish “values” versus “value,” we are not a value fund in the traditional financial sense. A better way to think about it is in terms of Business 360, a philosophy based on stakeholder theory. 

A business has several stakeholders to work with, but the only stakeholder that Wall Street tends to focus on is the shareholder. That is the one who does not need any more spotlight. With that in mind, we consider six different stakeholders, and we feel that if a company is doing well by these stakeholders, it is a non-financial leading indicator of potential future success. Not only do we think this is good from a moral and ethical perspective, but we also see it also a potential source of alpha. 

We consider the internal stakeholders to be the customers, employees, and the entire supply chain. If a company treats all of them well by having a good interaction and giving them a good product, good wages, good financial terms, or manages their contract well with them, this will increase loyalty with the customer, the employee, or the supplier. This will automatically decrease acquisition and retention costs. It reduces cost of sales, it tends to improve margins, yet this is all in the future. In other words, none of these factors are reflected immediately on any of the financial statements. 

We also consider value creation to external stakeholders such as communities, environment, and society. In terms of communities we ask ourselves the question – how does the company react with its immediate community? When we talk about value creation and value extraction, that applies to any of the stakeholders. Every good business transaction should involve value creation, meaning both parties should be able to benefit from the transaction. There are a number of ways a company can support a community through its tax base, interaction with the community generally, and by providing employment. 

If a company seems to be extracting value more than creating it, we see that as something of a liability that does not show up on the financials but may become a financial liability in the future.

We are coming to this investment approach from a Christian perspective, which is the driving force behind our philosophy. To put what I just said into religious terms, we think that God honors those who operate according to the divine principles. 

Q: What is your investment philosophy?

We believe that expertise is better than general knowledge. Most funds are organized around market caps, but we do not think it is sensible for someone to be an expert in large-cap stocks. That is similar to being an expert on companies based in California, which might not seem very feasible. It is much better for someone to have domain expertise much closer to a sector. 

An example of specific expertise is in the biotech and healthcare sectors. Finny Kuruvilla has a M.D. and Ph.D. from Harvard University; he has practiced medicine and has also been involved in medical research and some ventures in that area.

For other areas where we may not have the relevant expertise, we leverage credible sources of information through a process we refer to as Masters Select. We look for research analysts and portfolio managers that we consider to be experts in specific areas and look at their recommendations to get an idea of what their convictions are.

As mentioned earlier on, Business 360 is another core belief involved in our equity selection, according to which we will not invest in a company that we believe is extracting value from stakeholders. We think that is neither appropriate, nor wise. 

Also, when we talk about active investing, we insist that it should be truly active. This means we give no weight to the idea that we ought to invest in stocks just because they have a certain market cap or just because the market has invested in them. If an investor is going to pay us active management fees, we want to be truly participating in the selection of all stocks.

Q: How would you describe your investment strategy and process?

For an example of the investment process, we will focus on our flagship fund, the Eventide Gilead fund. This is our largest fund and has the longest track record. It is important to stress that the Gilead Fund is a diversified portfolio invested across all market caps. 

Although we tend to lean towards mid cap and growth stocks, market cap and the investment style are not part of our mandate. In fact, if we look at the distribution of our holdings, there is a broad investment range from small to large caps. We have a lot of flexibility and we did use that in 2008/2009, when we resorted to unorthodox strategies in order to manage risk. 

Being diversified is undoubtedly important. Gilead is not a sector fund and not a focused fund, although we do take more focused positions than many diversified funds. More particularly, we have had an emphasis on growth, which is how our philosophy has played out in recent years. We have ended up having a lot of companies that are generally known as classic growth companies, because that is where we found a good deal of value creation. More true-growth companies tend to be focused and on that so-important win-win paradigm for us. This is not exclusive, however, and the growth versus value question is not even part of our investment process. 

We tend to like more focused companies. Larger companies have a tendency towards conglomerates and it is hard to run a gigantic business in a number of different fields without having part of the business be value-extractive; so we tend to not be invested in those.

Business 360 is part of how we evaluate a company in terms of desirability for investment and not merely a limitation on which ones we avoid. Often, we get categorized in with socially responsible funds, and there is a wide diversity of approaches there. Some of them view screening as merely a constraint on investment but that is not how we view it. We view Business 360 as an integral part of what we do.

Q: Do investment themes matter to you?

Our investment process is rooted in investment themes and that is what drives our stock picking. For instance, apart from the automotive theme, we have followed a theme around electrification and alternative energy. We have also had a theme around network security and a fairly enduring theme around biotechnology. There is an amazing amount of value from expanding scientific knowledge in basic biology. 

We tend to focus on this premise because there is an attractive long-term opportunity since we have sequenced the human genome and gained a better understanding around protein folding and proteomics. There is simply a huge increase in the fundamental knowledge in this area. 

If we look at diseases, we have only recently begun to understand what the root causes are for a number of diseases. Of those only a small fraction have therapies available yet. Biotechnology is in the stage of taking that raw scientific knowledge and applying an engineering perspective to find a specific therapy that helps a particular condition so that we can actually address a root cause of disease. 

Naturally, there is a huge amount of value to patients and society in doing that. We think this ongoing series of breakthroughs is going to continue to be unlocked potentially for decades. We tend to invest about 20% plus of the fund in the growth of knowledge and value based on scientific advancement in biology. We are overweight in the healthcare sector and we have a strong conviction around this position.

Finally, when looking at position sizing we have to watch out for concentration, so we tend to size positions to make them big enough to make an impact on the portfolio but not so big that they would capsize the boat if something should go wrong with the investment thesis. Some of the growth companies, for example, have not yet proved 100% that they are going to be successful, but that is part of their nature. We see that inherent feature as an advantage, as it means there is a lot of risk in both directions and that risk is often orthogonal to what you have in the broad market.

We pay attention to internal portfolio correlations and we seek to diversify risk in the portfolio. At the same time we try to minimize the macro risks which are not subject to diversification.

Q: What is your research process?

When we look for a company, we want to see good risk adjusted growth potential, where growth means producing value. We like to see experts in the sector or field of the company confirm the basic investment thesis, and we like to see valuation that allows for some upside. We balance that with the internal portfolio risks. We like to see companies with solid financials, but there are often biotech companies, for example, where that is not yet possible and traditional financial metrics will not justify investment in the opportunity. 

That part of fundamental analysis refers to understanding their research process and what their addressable market is, rather than basic financial metrics. There is not a cookie cutter rule that we apply across the portfolio. 

Q: Would you share an example?

For example, we found out from the owners of Tesla cars how excited they are about the electric vehicles. These customers have become ambassadors of the company rather than just customers. For us, that is a really good sign. We then looked at the company itself and the leadership. It is really interesting to see how employees view their company because that says a lot about their level of commitment and excitement. 

We took a test drive in the car and we were very impressed by the experience. However, when we looked at the fundamental metrics on Tesla Motors Inc, it looked bad. If you did a traditional short-term discounted cash flow analysis on Tesla, the company was not likely to be profitable any time soon and the valuation looked completely crazy. But after consulting some of the experts in the automotive space, we took a deeper look at a longer-term cash flow and what the company is doing in terms of the automotive market generally, and when we played it out in a more patient fashion, valuation started to make sense.

Having done that, we invested in Tesla. We felt they were meeting our convictions around the internal and external stakeholders, and we liked the story in terms of its impact on society and the environment too. The stock has appreciated since we bought it and we continue to hold it. We still like what Tesla is doing. 

As for other investment themes, they are informed by a lot of reading. We want to see something in the environment that is bound to serve as a catalyst, resulting in growth and added value. For example, with computer network security, we read about the trends going on with cyber crime and with the need to protect networks. This points to a secular trend of something becoming more and more important. 

The theme indicates a certain set of stocks that participate in a space, and that gives us a basis to then go and look for the expertise of those who know something about the space. Then, we want to identify who is operating in a way that we would be comfortable owning. That is how we actually narrow down the funnel instead of starting with a big quantitative screening process. 

Q: What is your portfolio construction process?

We look at a three-legged stool to form our macro views, based on leading indicators, sentiment, and valuation. 

As we look at a broad array of different metrics we want to see a central tendency among those characteristics. We are looking for the confirming evidence across different perspectives from about nine or ten leading indicators in terms of the broad economy. When they are mostly pointing in the same direction, we get a good sense of conviction. Over the last few years the leading economic indicators have been consistently positive. 

The second step in the process is a contrarian indicator around sentiment. Here, we look at different sentiment indicators. One of our favorites is the aggregate allocation to equity versus fixed income versus cash that Wall Street analysts recommend to their clients. The more that is generally allocated towards equity, the better sentiment is. If everyone recommends stocks, then all the buyers have already taken notice of that and bought. If everyone recommends that clients have very little in stocks, it already means there is not much left to sell. Anytime you have an extreme sentiment reading one way or another, you probably should tend towards the opposite.

We have seen over the last several years that sentiment has varied from very bearish to neutral, and we view that as generally bullish. We have not seen over-extended sentiments other than on some very short-term numbers. 

For valuation, we look across a broad array of metrics. Among others, we usually look at the S&P 500 Index, cash ratios, P/E, and the equity risk premium. We view how valuations have gone from depressed to somewhat neutral at this point, which enables us to have conviction around our broad macro exposure. From that we take a measured overall beta. 

Probably the most important risk in the portfolio is the non-diversifiable risk. We build our funds with the idea that we think financial advisors and individuals are not going to put all their money in it; they will put it in a portfolio along with funds. If we have a higher R-squared or correlation to an index, there is no diversification versus that index. That is not really doing well for our clients. We are purposely trying to manage for a lower correlation to our index while still being an equity fund. Our macro views then inform our beta. When we have had constructive macro views over the last few years, we have generally kept our beta just above one. 

Q: What are your views on turnover in the fund?

Again, in terms of the portfolio we want positions big enough to move the needle but not so big that they are dominating the portfolio. We think it is good if our portfolio zigs when others zag. In fact, we want some of the idiosyncratic risk to come out in our fund pricing. We generally use cash balance to set our beta relative to what our holdings are. Our preferred holdings have tended to be pretty high beta names recently. We have run a little higher than normal cash balance so that the aggregate beta is set where we want it but we do not have that drive stock selection.

Our buy discipline is based on the premise that once we identify an investment that we want in the portfolio, we look at buying that over a period of time and building a position. It has to be at a reasonable price, but once we have that we try and maintain the relative allocation. Positions tend to be 1% to 3%, although sometimes they may exceed that.

In 2014, our portfolio turnover was 17%. We prefer to hold holdings for a long time, but sometimes, particularly in some of the biotech companies, they tend to be event-driven in nature. We will sell if we find new information that a company is not adding value so much as extracting it. Before we do that, we will often consult management to see if there is something they can do about it. 

We try to keep the number of stocks manageable by holding typically 60 to 70 in the fund. If there is no longer a reasonable expected investment return coming from a given stock, we may sell the company.

Q: Would you elaborate on your risk control?

For us, the most important risk factor is rooted in non-diversifiable risks, which generally means macro risk. Consequently, we are focused on trying to have relatively low correlation to the equity risk that we see in the market. One of the things that surprised people in 2008 and 2009 was that they felt everything became correlated with equities. We prefer risk that is orthogonal from the portfolio and risk that is not tied into the broad macro environment. 

The macro risk is succinctly summarized by beta to the S&P 500 Index. Almost everything is related to the S&P 500 in terms of broad market risk, even a lot of income funds end up having quite a lot of beta risk. That is the risk that our clients cannot get out of their portfolios by having more funds so we try to provide a risk profile that supplies a little bit of noise relative to the beta. 

If we have a chance to provide diversifiable risk versus non-diversifiable, we are going to pick the one that does not raise beta. That is what will be most helpful to our clients. That said, we have to have a solid conviction around our macro perspectives. We then use cash, and we can use some hedging instruments, but typically it is just cash, to adjust our portfolio to match that level of beta risk.

We monitor some macro risks, such as dollar-related risk, internally and we look at different sector risk, but those have a smaller effect compared with the macro S&P 500 beta risk.

According to our mandate, we are not a fund that is required to be 95% or 100% invested at all times. We think that if a manager can add value to their investors, by lowering the investor’s aggregate risk, it means the investor can have more confidence to actually invest in ways that are more helpful to achieving their goals. 

The biggest enemy of long-term investors is trying to predict the next move in the stock market and trying to avoid losses over very short-term time horizons. If we can give our investors some confidence that we are managing in their best interest, it can help them to avoid relatively short-term timing mistakes.