Investment Process

In over 50 years of investing, Warren Buffett says he has never made, or not made, an investment based on economic outlook or the general level of the stock market. He focuses on fundamentals and valuation, which is exactly what we do. We focus on good investment opportunities for the long-term.
George P. Schwartz, CFA

Investment Philosophy

  • Emphasize companies with superior business characteristics
  • Utilize independent analysis and proprietary screening supplemented by Wall Street research
  • Purchase shares of what we believe are financially sound companies when they are out of favor and attractively priced
  • Buy across market capitalizations if price represents a significant discount to our intrinsic value appraisal
  • Contrarian discipline may reduce the risk of loss and enhance returns
  • Sell stocks when they no longer meet our standards

Investment Focus

Superior long-term growth in earnings, cash flow and dividends can come only from companies compounding internally generated returns at superior rates. Our stock selection process begins in the same manner, looking for companies that generate returns on capital at above average rates. This means seeking high-quality companies with the characteristics below:

  • Provides ability to generate returns over and above their cost of capital
  • Patents
  • Network effect
  • High cost of customer shift
  • Strong consumer brand image
  • Regulatory hurdles to new entrants
  • Financial power to finance their own growth
  • Management is a good steward of owners’ capital


Opportunity lies in the spread between price and value. Financial markets have the perverse ability to make poor investments out of great companies. Paying too much for any investment will by definition generate subpar returns. We seek to generate superior investment returns with lower levels of risk by purchasing great companies for less than our independent estimate of their fair value, which includes a number of metrics:

  • Price/Earnings*
  • Price/Cash Flow
  • Price/Book High Return on Equity/Return on Capital
  • Low Debt

*Price/Earnings ratio (P/E ratio) is a valuation ratio of a company’s current share price compared to its per-share earnings. P/E equals a company’s market value per share divided by earnings per share. Forecasted P/E is not intended to be a forecast of the fund’s future performance.

Portfolio Construction

We construct portfolios in a bottom-up manner using fundamental security analysis. This may lead to overweighting and underweighting of individual industries. In some instances this phenomenon is fundamentally driven, i.e. certain industries such as regulated utilities, or commodities related businesses simply may not offer attractive return opportunities. Typically there are 35-50 issues in each portfolio.

Price may also lead to concentrations within the portfolio. If an industry or economic sector is either highly popular or unpopular, it may create overpriced stocks or attractive investment opportunities. Economic forecasts have little impact in our stock selection process. Price and our security analysis determine the companies, sectors and industries in which to concentrate. The economic environment does not have a major impact on the number of holdings.

Risk Management

We attempt to manage portfolio risk in the following fashion:

  • By selecting well run companies with conservative capital structures, we significantly reduce “blow up” potential.
  • With each portfolio typically holding between 35 and 50 stocks, we significantly reduce specific risk while still allowing for our stock selection process to add value. We strive to have no more than 5% in any individual issue at time of purchase.
  • While our stock selection is bottom up, we do use a macro analysis to look for dangerously high levels of industry concentration. Our goal is to have no more than 25% in any individual industry.

Research Process

Our equity research focuses on fundamentals of income statements and balance sheets in conjunction with the companies future growth prospects. This is augmented by external research from a variety of sources. We make investment decisions based upon our assessment of the risk reward relationship, and we use external resources for factual input.

The investment committee is comprised of portfolio managers and analysts and meets weekly. Our securities selection process is not committee driven, though. Individual portfolio managers are responsible for managing their portfolios, which may be in part informed by the input of other members of the investment committee.

Investment Process

We believe over the long-haul, well-selected equities will produce real returns for investors in excess of inflation and taxation.
George P. Schwartz, CFA

Our portfolio managers focus on the long-term (3-5+ years) and strive to keep emotion out of the investment decision-making process. The contrarian approach is rooted in a buy low and sell high philosophy and short-term negative news may create an opportunity to buy at attractive prices. While portfolios are not tax-managed, our conviction-weighted holdings and buy and hold discipline may lead to low turnover. Stock positions may be trimmed when they get too rich or exited entirely if we identify a better alternative.

  • All domestic companies listed and traded on U.S. stock exchanges plus select foreign companies traded on their respective exchanges.
  • Purchase shares of companies that we believe are financially sound when they are out of favor and attractively priced.
  • Stock price exceeds our estimate of intrinsic value
  • Company fails to achieve expected financial results
  • Economic factors or competitive developments adversely impair the company’s value
  • Company becomes a violator of any moral screen established by the Catholic Advisory Board
  • Diversify across industries
  • Generally limit position sizes from 1-3% at time of purchase
  • Top-down/Macro adjustments

Morally Responsible Investing

Morally Responsible Investing (MRI) is a subset of socially responsible investing, which often screens out companies engaged in environmental issues, tobacco products, alcohol, nuclear power, defense, oil and “unfair” labor practices. MRI is different in that it screens out companies engaged in activities that are not pro-life or pro-family.

The moral screens utilized in the Ave Maria Mutual Funds are established by our Catholic Advisory Board which provides guidance in accordance with the Roman Catholic Church. The Board meets regularly to review the Funds’ religious standards and criteria.

Our goal is to provide good returns without compromising moral values.

Moral Screens

Many assume MRI screens would eliminate a large number of companies from investment consideration. In fact only about 5% of the companies in the Russell 3000® Index are excluded. In short, the vast majority of companies may still be considered for investment in a portfolio.

We place equal emphasis on investment performance and moral criteria. Investors should not have to sacrifice financial performance potential because of their pro-life and pro-family beliefs. Every stock and bond we buy must first meet the financial criteria set by our experienced team of portfolio managers and analysts. If a security seems like a portfolio prospect, then the company is screened based on the moral criteria.

We employ four main moral screens, which are detailed below. The types of companies that are eliminated from investment consideration are also shown.

moral screen 1: Abortion
  • Selected drug companies
  • Hospitals
  • Insurance companies
  • Retailers
moral screen 2: Embryonic Stem Cell Research
  • Selected drug companies
  • Hospitals
  • Insurance companies
  • Retailers
moral screen 3: Planned Parenthood
  • Companies that contribute corportate funds to Planned Parenthood
moral screen 4: Pornography
  • Various producers & distributors
  • Media companies
  • Hotels
  • Retailers
  • Internet & cable providers

Diversified Family of Funds

Our focus is on long-term fundamentals. While individual quarterly earnings releases may contain information which influences our long-term outlook, in our opinion much of what is discussed qualifies as distracting noise with little long-term significance.

The selection process is similar for all of our five no-load funds; however, there are differences among them. Below is a description of each and the types of companies/investments we attempt to utilize:

  • Emphasis on growth of dividends of exceptional companies
  • Financially powerful companies with the ability to sustain growth
  • Companies typically in mature portion of life cycle (large-caps)
  • Emphasis on earnings growth
  • High reinvestment rate
  • Capacity to invest retained earnings at high returns
  • Return of cash to shareholders via dividends or share repurchases
  • Companies typically early in their life cycles (mid- and largecaps)
  • Favorable stock price in relation to cash flow, earnings, dividends, book value and asset value
  • Strong historical and prospective growth potential
  • Catalysts which have a favorable impact on shareholder value
  • Companies of all sizes (not market cap constrained)
  • Invests in US and non-US companies around the world
  • No more than 25% in any one country (except US)
  • May invest in emerging market countries including; South Korea, Brazil, China, Mexico, Taiwan, South Africa and India
  • Emphasis on earnings growth
  • Pricing power
  • Sound balance sheet
  • Sustainable competitive advantage and leading market position
  • Reasonable valuation
  • Companies of all sizes
  • Emphasis on undervalued securities
  • Invests in short and intermediate maturity bonds
  • May invest up to 20% in stocks of companies that consistently raise their dividends

Fixed Income Process

Our fixed income investment process includes a combination of top-down and bottom-up analysis. We manage duration of the portfolio based upon our interest rate outlook, which is influenced by the general economic outlook. Sector decisions are also based upon our economic outlook and the incremental yields available. Individual security selections are based upon individual credit spreads as well as internal and external measures of credit worthiness. In many instances, our credit decisions are derived from our own equity analysis. Because we purchase domestic securities, currency analysis does not figure in our decision making. Decisions to sell are generally based upon the same factors used in making purchase decisions, a change in our interest rate outlook, changes in relative interest rate spreads or some deterioration in the underlying credit fundamentals.

Alpha Generation

We feel that we can add alpha through our disciplined bottom-up security selection. Due to our focus on sound operating fundamentals, conservative capital structures and proven staying power, we believe our companies should do well over entire market cycles. They may perform especially well on a relative basis, when the economy is struggling. We expect the weakest relative performance when the economy is growing rapidly and investors are more inclined to speculation.


Price/Cash Flow Ratio is an indicator of a stock’s valuation. Although there is no single figure to indicate an optimal price-to-cash-flow ratio, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation. The ratio takes into consideration a stock’s operating cash flow, which adds non-cash earnings such as depreciation and amortization to net income.

Price/ Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)  is a ratio used to gain some insight about whether a company’s stock price (and thus a company’s value) is too high or too low.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)  is a ratio used to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.

Price/Book Ratio is used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

Return on Equity is a ratio that provides investors insight into how efficiently a company (or more specifically, its management team) is managing the equity that shareholders have contributed to the company.

Return on Capital is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.