John Reese has factored into his quantitative models the stock-picking methods of a "dream team" of eminent investors.
"I modelled the decision-making processes of 17 investment gurus who clearly outlined how they went about selecting stocks," says Reese, who co-manages two foreign-equity mandates offered under the Omega brand name for the National Bank family of funds.
"The extra-magic software that I add is (that) I tend to look for high degrees of consensus among the strategies," says Reese, who is the author of The Guru Investor: How to Beat the Market Using History's Best Investment Strategies. Among the famous names whose methods Reese has drawn on for his models are Warren Buffett, Benjamin Graham and Peter Lynch.
Reese is the founder and CEO of Validea Capital Management, LLC, which is based in Hartford, Connecticut. With his colleague Jack Forehand, he co-manages the $232-million Omega Consensus International Equity and the $229-million Omega Consensus American Equity as a sub-advisor to National Bank Securities Inc.
Relying exclusively on his models, Reese makes no qualitative judgments when selecting stocks. "I consider that a negative," he says. "In general, I've found that misleading. I tend to use a more scientific, statistical portfolio approach."
In managing Omega Consensus International Equity, Reese limits his universe of stocks to those that are traded on the U.S. stock exchanges. This, he says, enables him to be confident in the companies' financial reports.
He also eliminates from consideration the riskiest or smallest companies, leaving him with a universe of around 600 stocks. Among the 50 stocks held in the mandate, large-capitalization names represent about 75% of the overall portfolio.
Reese's model incorporates both growth and value criteria. But in general, he says, "even the growth gurus have a value orientation." For example, among the fund's top 10 holdings is Buenaventura Mining Co. Inc. BVN. It's a Peruvian gold-mining company that Reese says meets the criteria most closely of Peter Lynch, Benjamin Graham and David Dreman.
"It's rare when all strategies will agree on a company," says Reese, "so it's significant when not just one but two or three like the company." Buenaventura is "in the sweet spot" for Lynch's parameters of a fast-growing company and also meets his criteria of very low debt to equity.
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Reese, 60, a native of Los Angeles, has an engineering and information-technology background. After graduating from Massachusetts Institute of Technology (MIT) in 1974 with a bachelor's degree in electrical engineering and computer science, he joined ADC Telecommunications Inc. in Minnesota. He says he was probably one of the first 100 engineers in the country to work with Intel microprocessors.
After two years, Reese enrolled in the MBA program at Harvard University. Graduating in 1979, he then joined Texas Instruments as a software product manager. Two years later he left to join GTE (now Verizon Inc.), where he worked as director of strategic and technical planning for telephone products and data communications.
At the invitation of a former Texas Instruments colleague, Reese joined Coleco Electronics, where he worked as a marketing manager for electronic products. In 1984, he founded Micro Networks of America, which built local area networks. Nine years later he sold the firm to GE Capital.
Pursuing his fascination with stocks, between 1993 and 1996 Reese developed ways to invest his own money. In 1997, he established Validea.com, which involved a free database service and paid subscriptions. In 2003, Reese and Forehand developed the guru model portfolios.
In 2004, encouraged by the performance of the model strategies, Reese set up Validea Capital Management. Besides acting as a sub-advisor, the firm oversees individual accounts. Validea has approximately US$550 million in total assets under management.
Under Reese's tenure, the Morningstar 5-star rated Omega Consensus International Equity has a compound annual return of 18.3% for the five years ended Feb. 28, compared with the median 12.9% return in the International Equity category. Reese credits the strong track record to his firm's consensus-based process of employing the best, time-tested strategies, and also to prudent diversification and portfolio rebalancing.
Immediately after the rebalancing, Reese's mandates include only the highest ranked stocks at the time, eliminating those that are no longer within the top 50.
The rebalancing can result in sharp shifts in sector exposure. For example, when the international equity fund was rebalanced at the beginning of December, investments in the energy sector doubled from approximately 10% to around 20%, and the information-technology sector dropped from an approximate 22% weight to around 15%. The mandate limits holdings in any one sector to no more than 40%.
"We're not trying to make bets on particular sectors or countries," says Reese. "Those changes are bottom-up changes. There's an opportunity cost in terms of holding a lower-ranked stock."
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