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Notes from the MIAM Research Desk

October 19, 2022

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As the world continues to guess what inning of the cycle each industry and market is in, we reflect on why evaluating management’s capital allocation priorities and abilities is so important to our research process. Because our investments have a long-term horizon, we are focused on management’s ability to make prudent, long-term capital allocation and operational decisions.

A portion of our analysis of management’s philosophy and ability occurs prior to each investment. We speak with senior management of prospective portfolio companies before we enter the position, and we do a thorough review of each member’s prior history with public companies to assess how they have managed those businesses, and in particular how they’ve allocated capital in differing environments. After we have initiated a position, we continue to speak with management to assess its capital allocation philosophy against today’s conditions and any that we foresee as possible. Each company and industry will require a unique analysis, and each management team is evaluated in light of business necessities and long-term goals.

To complicate matters, each company’s stated capital allocation priorities can vary widely. Some companies, like 2020 Bulkers Ltd., pay out dividends to equity owners a certain percentage of its net income for a given period. This model provides us with an easy-to-calculate expectation of where capital will flow over time and allows us to plan how we may reinvest dividends either in that company or elsewhere in the portfolio. Other companies engage in a complicated web of paying dividends, buying back common stock on, paying down debt principal, tendering for outstanding debt, retiring treasury shares, deploying capital for acquisitions, and reinvesting in the business. This, understandably, takes quite a bit more time for our research team to study and evaluate, and in our opinion can result in increased execution risk.

While a multifaceted approach to capital allocation may increase risk and complexity, we do not endorse a single capital allocation strategy for all companies. We also concede that management will have a more complete picture of what is necessary for the company. Consequently, we continually speak with management about its stated priorities and evaluate its philosophy and practices versus our view of what is appropriate for the company at the time.


Each discreet mechanism for capital allocation has many facets that we discuss at length internally to form questions for company management. Because of the importance capital allocation has on keeping a company a going concern, we spend an outsized amount of time and effort to ensure that we select companies with management who are prudent capital allocators and are consistent and accurate communicators of its plans. Ultimately, we invest in businesses that are fundamentally sound and well positioned for long-term growth. Our research team continues to evaluate new ideas and portfolio companies considering this objective, and thorough study of a company’s capital allocation is a key part of that evaluation.

As always, please reach out to MIAM if you are interested in partnering or you would like to discuss a particular company or idea.

Sincerely,

The MIAM Research Team

This document is published by Milwaukee Institutional Asset Management (MIAM), a division of Global Value Investment Corp. (GVIC). MIAM is the institutional investment advisory division of Global Value Investment Corp., providing investment advisory services to institutional investors including Registered Investment Advisors and Broker-Dealers. All statements or opinions contained herein are solely the responsibility of Milwaukee Institutional Asset Management. The material, information and facts contained in this report were based on publicly available information about the featured company and were obtained from sources believed to be reliable but are in no way guaranteed to be complete or accurate. This report is for informational purposes only and should not be used as a complete analysis of any company, industry or security discussed within the report. This report does not constitute an offer or solicitation to buy or sell any security, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. An investment in any security referenced in this report may involve risks and uncertainties that could cause actual results to differ from the analysis provided herein, which may not be suitable for all investors. Past performance should not be taken as an indication or guarantee of future results. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. Employees of GVIC may have positions in securities referenced in this report. ‘Intrinsic’ or ‘Appraised’ value refers to MIAM’s quantitative and qualitative assessment of the value of an enterprise. Market capitalization is a measure of the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current quoted share price. MIAM’s investment strategies generally invest in a smaller number of securities than some other strategies. The performance of these holdings may increase the variability of a strategy’s return. There is no assurance that dividend-paying stocks will reduce price variability. Value investments are subject to the risk that their intrinsic value may not be reflected in market prices. For purposes of distribution in the United States, this report is prepared for persons who can be defined as “Institutional Investors” under U.S. securities regulations. Any U.S. person receiving this report and wishing to affect a transaction in any security discussed herein must do so through a U.S. registered Broker-Dealer. Neither Global Value Investment Corp. nor Milwaukee Institutional Asset Management is a registered Broker-Dealer.

An investor should consider a strategy’s investment objectives, risks, charges and expenses carefully before investing. This and other important information can be found in the Firm’s SEC form ADV Part II. To obtain a copy of GVIC’s ADV Part II, call 262-478-0640 or visit www.gvi-corp.com. Please read the ADV carefully before investing.

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