The Polygon Investment Process

Our investment process is top down and uses a core satellite approach. We believe that asset allocation is the primary determinant of performance, particularly for a global manager. Accordingly, we focus our intellectual capital on analyzing the optimal asset class, and geographic orientation, to make the most money per unit of risk for our investors. We do not place a great deal of emphasis on individual equity selection in efficient markets, which has a significant impact on performance only if the portfolio is very concentrated, and therefore, riskier. Within client guidelines, we are unconstrained in our portfolio construction and look for value across a broad range of asset classes; including stocks, bonds, commodities, real estate, and other forms of alternatives. We believe diversification and the purchase of assets which do not correlate with equities are particularly useful forms of risk control. However, all of the securities we purchase are marketable and can be liquidated within a week, or less.

Polygon seeks to bring an institutional methodology to smaller investors by offering a sophisticated and intellectually rigorous framework. All of our portfolios are individually tailored, and we spend a great deal of time trying to understand and define our clients’ objectives, appetite for risk, investment time horizon and future liabilities. Polygon takes a hybrid approach to investment management, seeking to combine the most productive elements of internal and external management, as well as active and passive methodologies, in a disciplined process. The bulk of our positions are managed internally in a long term, strategic core. However, smaller satellite portions are often managed externally via specialist, active managers, particularly in inefficient segments of the market like US small cap or Asian equities, where we believe stock picking strategies can generate long term out performance.

Basically, this is the theory of comparative advantage — we focus on what we believe is the source of greatest value creation and where we have the greatest expertise – asset allocation, and picking securities in the developed markets — and use specialist, best of breed managers to invest in niche markets. Generally, 70-80% of our assets are internally managed in a core designed to provide exposure to major segments of the markets with minimal transaction costs (low cost Beta). Where we feel markets have mispriced securities, or we have an informational advantage, we pick stocks on a fundamental basis, with a focus on value. We seek to generate additional out performance (Alpha) by investing tactically in smaller, higher return environments, for example, India and Eastern Europe, but control the risk by generally limiting exposure to 1-5% of the portfolio in these satellite positions.

When needed, external equity managers are selected based on a number of criteria, including: philosophy and investment process; the quality of the people in the firm; and, lastly, long term performance. We also look closely at total expense ratios and favor smaller, boutique firms which specialize in the geographic area or asset class in which we are investing. There are a number of different types of vehicles which may provide solutions to this investment challenge.

In efficient markets like the US large cap segment and Europe, we may utilize exchange traded funds (ETFs) to generate low cost exposure. In the satellite portion of our portfolios we occasionally make use of closed end funds (investment trusts in the UK), particularly in emerging markets, and have developed something of a sub specialty in analyzing and purchasing these types of instruments. Since such securities often trade at a discount; we seek to acquire them at prices below net asset value and to sell them when the discount has narrowed, or hopefully, at a premium.

Bonds and alternatives. Fixed income securities form an important part of our core holdings and, as with equities, we seek to maximize the diversification benefit by investing in markets which do not correlate closely with each other. We prefer higher quality, deeper issues such as government bonds and agency debt, and are biased towards shorter duration issues, which we believe represent a better trade-off between risk and reward. Depending on client preferences, the conservative, risk averse component of our portfolios may comprise 30%-40%, or more, of our portfolios. Characteristically, in addition to fixed income securities, this would include exposure to non correlated alternative strategies such as publicly traded real estate, private equity, and hedge funds of funds. Limited exposure to commodities may also be a useful diversifier. These defensive positions are designed to be non directional and absolute return oriented, mitigating the volatility of equity markets and giving investors some degree of down side protection.

Asset Allocation and stock picking. Polygon’s decision making is based on multiple factors, including: macroeconomic fundamentals such as GDP, inflation, balance of payments, current account and budget surpluses or deficits, etc. Political risk and cultural attitudes towards business and investments are also important criteria in our asset allocation process. On the stock picking side, valuations, including dividend discount models, P/E ratios and return on equity are emphasized, though some technical factors like liquidity and mean reversion are also analyzed. In terms of style we favor both value oriented and small company strategies, as the data shows that over time they have outperformed in most equity markets around the world.

Diversification and risk control are critical to our investment process. As noted above, we are very global in our approach, and seek to diversify across asset classes and regions. The neutral asset allocation position for our core strategy, Global Growth, is 70% equities and 30% non directional, absolute return oriented strategies, including fixed income. These ratios will, of course, change over time depending on our forward looking assessment of market conditions.

Service. Service is a critical component of a Polygon relationship. We focus on providing a communication flow tailored to meeting client requirements and to putting our clients’ interests first. We endeavor to respond to all requests within 24 hours.

Performance. Since inception in Dec 2002 Polygon has outperformed both US and global equity markets by a substantial margin — with lower risk. We offer two primary approaches: Global Growth and Global Balanced, as well as customized strategies. For additional information please email Philip Winder at or call at: 1 609 921 2445.

Turnover. We believe that turnover is a drag on performance and are therefore generally long term buy and hold investors. Polygon’s annual turnover is typically less than 50%. For taxable, US based, investors we seek to minimize tax liability, consistent with our overall strategy.

Administration and custody. We monitor our portfolios continuously, using a variety of electronic sources which instantaneously notify us of significant portfolio movements. Our systems have specific alerts which are triggered if a position gains or declines by more than 5% on any day, if there are news items about the firm, or if there are significant changes in analysts’ expectations. We are driven by client preferences and offer several different custody options. Many of our clients use Fidelity as their custodian, as they have minimal fees and a robust technology platform which provides electronic access to the contents of client portfolios 24 hours a day. They can also offer credit card and check writing facilities. Please note that we are not tied to Fidelity in any way, and are happy to use other custodians of our clients’ choosing. For international clients who prefer a non US custodian, we also have a relationship with a Swiss based bank.

Compensation. The only fee Polygon receives is its annual management fee (and performance fees, if applicable). We receive no other form of compensation from any source, and discounts (if any) are passed on to the client. The minimum size of our portfolios is $ 1,000,000. We are happy to provide details about either our standard, or performance, fee on request.