New Amsterdam Partners now asks important questions about potential investment candidates that cannot be answered with numbers alone: Does this company make sense in the current economic environment? What is the potential future of the industry in which the company operates? What is management’s growth strategy? Does management have the capability to execute?

Does the story behind the numbers make sense?

Crossing the threshold from quantitative to fundamental analysis is still considered heretical by many quantitative portfolio managers. Our early professional background had taught us that fundamental analysis is "soft" compared to the hard discipline inherent in mathematics. To indulge in fundamental research, we used to believe, is to become vulnerable to the kind of emotion that clouds judgment.

Then experience taught us the necessity of integrating theory with practice. In gaining experience, we gained common sense. New Amsterdam Partners now asks important questions about potential investment candidates that cannot be answered with numbers alone: Does this company make sense in the current economic environment? What is the potential future of the industry in which it operates? What is management’s growth strategy? Does management have the capability to execute that strategy? Is management committed to building shareholder value? Digging for in-depth answers to these questions has had a substantial positive impact our investment performance.

New Amsterdam Partners performs fundamental analysis on the top 100 companies to select a portfolio of approximately 40-45 stocks. We review analyst sentiment on the stocks to evaluate the consensus rationale for investment and to ensure that there are no problems in the companies and their industries. We build cash flow models and perform sensitivity analyses to determine the margin for error in our estimates. To hone our own fundamental rationale, we attend company meetings and analyze company reports and announcements. We remain current on developments that may affect portfolio holdings.

Most importantly, we constantly assess developments in the world around us in search of new investment ideas. Successful investments have developed from our analysis of the impact of technology on non-technology businesses, our perception of the impending consolidation of an industry, and our interpretation of the implications of regulatory developments.

Our investment process represents an approach that is 50% quantitative research / 50% fundamental analysis. Performance attribution analysis indicates significant excess returns from fundamental stock selection.

There are several reasons why New Amsterdam Partners may not invest in a company, even when the numbers indicate a high expected return: the company may be facing litigation with potentially negative consequences; it may have missed recent opportunities to establish or retain industry leadership; rising costs in its industry may indicate that companies that help control industry costs represent better investments.

Many such critical variables can be captured only through fundamental analysis. Of course, sometimes fundamental analysis leads us not to invest in a top 100 company that ultimately provides strong performance. But we would rather avoid disaster on the downside than miss a big gain on the upside.

In addition to managing against stock-specific risk, New Amsterdam Partners controls portfolio risk through disciplined stock and sector diversification. Our initial investment in a stock typically is 2.5% of the 40-45 stock portfolio, and we reduce positions when a holding reaches 5.0% of the portfolio. For major sectors, we are never more than two times or less than one half the benchmark weighting.