KING is a bottom-up value manager adhering to what we call the Business Valuation Approach. The Business Valuation Approach seeks to identify attractive investment opportunities using a broad definition of value. This approach uncovers securities often overlooked by other investors. For more than 25 years, KING has used Business Valuation to find value in different types of securities at different points in the economic cycle, in varied economic environments.

Investment Process

Our buy criteria consist of three elements. Essentially, we buy a stock which trades at a discount to its:

• Private-market value;
• Five-year projected earnings growth rate; or
• Seven-year historical valuation based on its price/earnings, price/book, price/cash flow, or price/sales ratios.

Unlike typical value managers who practice only a Graham and Dodd approach (buy only low P/E or low price/book stocks), KING will buy growth, but at a reasonable price. Earnings growth is certainly a positive attribute of a company, but an attribute for which investors often pay too much. If purchased at a value price, a growth stock can be an excellent investment.

Our emphasis on private-market valuation makes us, if not unique, certainly one of a distinctive minority. Essentially, a company's private-market value is the amount that an individual or institution would pay for an entire, publicly traded company. Our target price takes into account such characteristics as cash flow, assets, management team, goodwill, plus the assumption of any debt. In addition, a premium is usually paid to take sole control of the company.

Our focus on this type of analysis over the past 27 years has successfully identified undervalued companies. KING buys a stock when its perceived value (the price at which the market values it) is at a significant discount to its private-market value; the wider the gap, the better. Quite simply, we try to buy a dollar for fifty cents. This spread can be closed through price appreciation resulting from many factors, including takeovers, restructurings, spin-offs to shareholders, or other catalysts.

We sell a stock when it meets its price target, if the company's fundamentals change, or if we find a more attractive alternative.

Portfolio Construction

KING's portfolios typically include between 20 and 35 stocks, depending on the strategy of the portfolio. Due to our bottom-up stock selection process, portfolio holdings may be concentrated in a number of companies in the same industry, resulting in weightings dissimilar to the overall market. Individual security positions are limited to 5% of the portfolio at cost.

For balanced accounts, KING believes that asset allocation should be driven by the investment objectives of the client, not by tactical allocation based on projected asset returns. Thus, asset allocation is decided at the start of the relationship by the client and his consultant, if applicable, and the portfolio manager. Updates occur as needed. Our clients' asset allocation decisions range from 50% equity/50% fixed income to 85% equity/15% fixed income. If a client gives no asset allocation direction, KING's typical allocation model is 70% equity/30% fixed income.

Fixed Income

KING manages fixed income assets with a value-oriented approach similar to our equity selection process. For tax-exempt accounts, KING focuses on the yield spreads between Treasuries, Agencies, and corporate issues, and we buy and hold bonds with the greatest total return potential relative to the credit risk involved. For taxable accounts, we add municipal bonds to the portfolios if the expected total after tax returns is greater than using comparable taxable issues. Maturities range between one and fifteen years, and the average duration of fixed income assets is shorter than the broad indices.

The credit quality mix is set by our clients. Many of our clients have no credit quality restrictions, while others restrict us to only investment-grade issues. Over the long term, the unrestricted accounts outperform the restricted accounts. Recent unrestricted portfolios include a mixture of investment-grade and high-yield corporates, with U.S. Treasuries to maintain a modified ladder structure. The corporates, which are purchased after thorough credit analysis, offer significantly higher yields than the Treasuries. Possible credit upgrades offer capital appreciation potential. KING will also purchase hybrid securities (such as convertible bonds) should there be an attractive opportunity.