VN Capital Investment Process and Philosophy

We founded VN Capital Management to provide investors with a powerful investment vehicle that seeks to maximize their wealth over the long term while maintaining strong emphasis on capital preservation and low correlation to the equity markets. That vehicle is the VN Capital Fund I, LP, which is a conservatively managed long/short equity “hedged” fund, investing in small to mid cap, US-listed equities using a value style of investing. The fund maintains a concentrated portfolio of 8-12 holdings, employs selective hedging through short sales and the use of options, minimizes turnover, and employs no leverage.

We aim to achieve these goals through a three step investment process: First, we generate fresh investment ideas by identifying areas where we think market irrationality exists and, therefore, where we can take advantage of mis-priced assets.

This includes areas where (a) an isolated and usually very well publicized problem taints an entire industry (“bad apple syndrome”), (b) industries enduring temporary cyclical troughs, not systemic decline, or (c) companies and sectors are simply overlooked or ignored due to their small size, mundane nature of their business or lack of Wall Street research coverage. By generating investment ideas this way, we feel that we can limit the amount of external risk that a company may be subject to and to provide a positive catalyst to its stock price upon a reversal of the trend.

Next, we apply a conservative value philosophy to individual stocks. VN Capital's investment program is entirely committed to the value style of investing, which is predicated on the notion that a security has an intrinsic value that can be determined through analysis of a company's core earnings power, balance sheet, cash flow, industry dynamics and relative operating performance.

Our goal is to uncover situations where the determined intrinsic value of a security is substantially greater than the prevailing market value and hence there is a likelihood that the market value will rise to reflect the intrinsic value through management action or other catalyst. (The classic simplification of this approach is “to buy a dollar for eighty cents”.)

This philosophy has the inherent benefit of risk management by the very process of stock selection - buying companies that are carefully determined to be undervalued reduces risk of severe price declines. We evaluate the true value of a company's assets and liabilities versus their reported values seeking to eliminate companies with overstated assets or understated liabilities and identify companies with understated assets.

We determine a company's long term “core” earnings power over the economic cycle, analyze its competitive environment, quality of management and the sustainability of its business strategy. We do this to limit company specific risks (financial, regulatory, legal, or competitive) and identify well positioned companies within those attractive investment areas we identified earlier.

VN Capital employs limited, selective shorting of stocks to provide modest insulation from broad market declines and to take advantage of overvalued situations. In contrast to our selection process for “long” positions, we search for “short” candidates among stocks that receive wide exposure to the investment community through research coverage or that are the beneficiaries of publicity by virtue of fitting within a favored trend or theme.

This modest “hedging” activity supplements the management of risk that is inherent in our stock selection process. We will take short positions where the fundamentals of a company do not justify the market valuation by a substantial margin.

Finally, we construct a portfolio with 8 to 12 US-listed equity securities whose market values are lower than the determined intrinsic value by 30% or more. Each portfolio stock will typically represent 5-15% of the portfolio's overall value, while no one stock will be allowed to exceed 25% of the entire value. We also seek to maintain 1-3 short positions representing no more than 15% of the portfolio. We will maintain a cash position equal to our short position in order to keep total exposure at 100%, in other words completely without leverage.

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