Sell Discipline

Our sell discipline is based on the philosophy that the key difference between a winning strategy and a losing strategy is that winners make small mistakes and losers make big ones. Thus, our sell discipline is designed to keep the inevitable individual mistakes from causing large, permanent loss of capital in the broader portfolio.  Perhaps the most distinguishing characteristic of our sell discipline is that we do not average down on losing positions.

There are three circumstances in which the portfolio management team will sell a holding:

1. Investment Becomes Overvalued.  The management team will sell a holding when it achieves the price target or becomes too large in the Portfolio (exceeding 5% of the Portfolio’s assets). 
2. Failure to Execute.  The management team will sell a stock if its fundamentals turn negative and/or if warning signs emerge within the industry. A sell decision may be made if the dividend is cut or becomes threatened, as evidenced by a rising pay-out ratio, an eroding balance sheet, etc. 
3. Losses Develop.  The management team seeks to control total unrealized losses in the Portfolio by adhering to a policy of not averaging down on losing positions and of trimming declining stocks before they adversely impact the Portfolio’s overall performance. Individual security thresholds will vary based on the size of position, price volatility, etc. River Road establishes a target threshold of total unrealized losses as a percentage of total assets in the Portfolio. When the target threshold is exceeded, the portfolio management team is forced to trim or eliminate losing positions based on conviction in the Portfolio. This figure, which may vary depending on market conditions and timing of flows, is a risk management threshold that has historically proven valuable in managing total accumulated portfolio losses.