Galibier Capital Management Ltd.

Step 1: Define Investable Universe
Security selection consists of an ongoing process of generating ideas for inclusion into our investable universe. These ideas can come from a myriad of sources including: internal research, industry conferences, past experience, management meetings, database screening using market data providers and The Value Line, news, etc.
The key characteristics required for inclusion into our investable universe are as follows:
Enduring competitive advantage
High cash flow
Management with a demonstrated record of good governance and maximizing shareholder value
Above average long term growth prospects
Appropriate financial leverage
To define our investable universe, we begin by screening all North American equities (4,000+ companies) based on the above five criteria. This initial screen results in an investable universe that is comprised of approximately 400 names with a further refined “focus list” of 100-200 names.
We are constantly monitoring the investment landscape seeking to add names to our investable universe.

Step 2: Value Target Companies
We employ a rigorous proactive valuation methodology. The sector analysts / portfolio managers apply their knowledge of the company’s growth prospects, competitive position and management strategy to develop a projection of 3 to 5 year out earnings and cash flow power, free cash flow accumulation and balance sheet structure.
The analysts / portfolio managers then assign an appropriate capitalization rate to forecast where the stock will be trading 3 to 5 years hence.
The analysts / portfolio managers then assign an appropriate rate for our required total return / hurdle rate (which is generally between 12%-15% per year) to determine intrinsic value today.

Step 3: Construct Portfolio
The portfolio construction process is driven by the firm’s bottom-up, stock-by-stock selection process. The portfolio is diversified across industries and will typically hold 20-30 names. Average security weights typically range between 3% – 7% of the portfolio. Security weights are driven by the attractiveness of the valuation of the particular security relative to the other holdings in the portfolio.

The investment decision making process is best described as a consultative “hub and spoke” approach that has been developed to ensure autonomy, responsibility and accountability. The lead portfolio manager, in consultation with sector analysts, is responsible for the final buy / sell decisions. The sector analysts, who are also portfolio managers, have responsibility, autonomy and accountability for all investable stocks in their sectors.
Galibier defines risk as a permanent loss of capital and/or underperforming an acceptable rate of return — not underperformance relative to an index. At the stock level, risk is controlled by investing in companies that have an enduring competitive advantage and that are diversified across industry. In addition, there is a large ‘margin of safety’ in determining our transaction price and each stock is continuously monitored for changes in fundamentals, management action and valuation.

Step 4: Manage Portfolio
Galibier’s proactive valuation methodology provides the foundation for strong ongoing portfolio management. Our portfolio management process is driven by:
1.Opportunistic monitoring of market prices versus derived intrinsic values of investable universe and target companies
2.Rigorous portfolio analytics to ensure sufficient diversification across industries, market capitalization, and operating models
3.Diligent monitoring of aggregation risk to ensure portfolios are not overly exposed to macro factors such as foreign exchange movement, interest rates, etc.

Being a long-term investor, Galibier expects the average holding period for portfolio holdings to be approximately 3-5 years.

Source: Galibier Capital Management Ltd.