Each step of Cardinal’s investment process, from idea generation to portfolio management, is designed to balance expected return against the risk of losing money.  The key principles are that risk mitigation does not mean return mitigation, Cardinal embeds risk mitigation in the investment process, and that risk management is a group process. 

From a process perspective, Cardinal’s rigorous due diligence, idea vetting and group decision making process limit risk by controlling the quality of work and providing continuous and significant oversight.  Just as Cardinal requires the economic alignment of interest of portfolio company management teams with shareholders, portfolio managers are also accountable for every position, and the firm bases compensation on client performance.  Cardinal’s focus on companies which generate substantial free cash flow also mitigates risk as managements are incented and able to repurchase their stock when equity markets are weak, and stock prices are low.  In addition, Cardinal’s high hurdle rate, focus on predictable businesses, and conservative forecasting, reduce the risk of and impact of forecasting errors. Continuous research ensures that the team is alert to changes in company fundamentals that could impact shareholder value.

Consistent with Cardinal’s investment discipline, the focus of the investment team is on the stocks of companies where business performance is generally less dependent on the growth rate of the U.S. economy. By attempting to limit macroeconomic risks and taking them only when the portfolio managers feel that they are adequately compensated, Cardinal believes that overall portfolio risk is reduced because tools under management’s control are generally more dependable.