Robert Gillam of McKinely Capital Management

Market Wizards Index: +31%
Compound annual over 6 years

Fund or affiliation
McKinley Capital Management

Methodology
A combination of both quantitative analysis (stressing on earnings growth acceleration) and momentum (measured by alpha).

Research Techniques Employed
Gillams database contains 13,000 stocks. Each Saturday they run an alpha for every stock (using a base index like S&P 500).
Gillams quantitative data ranks every stocks earnings acceleration and growth rate in a grid on a scale of 1 to 99. This constitute part of his "E-rank". The most important of its 5 subcomponent is Standard Unexpected Earnings, a rank of the earnings acceleration. All holdings must be in 20%-tile or better in E-rank.
Gillam optimizes the risk/ reward using the standard deviation of the string of returns. He can then choose stocks to optimze a return based on a given risk level.
Gillam follows the research of every analyst that follows the company live. He rates analyst on a scale of 5. He pays attention when a rate 1 analyst made a big adjustment to his estimates.
He uses all the data services that provide earnings intelligence, like IBES, which gives a pre-announcement information. He computes a probability (using the ratio of percentage change of estimates and no. of days before announcement) of whether a stock will hit, exceed or miss estimates.
Gillam keeps his database very current and adjusts data for special events (like one-time charges).
Screens out (abour 2/3) stocks which:
Less than $10 a share.
Trades less than 50,000 shares per day.
With higher leverage than their minimum set for its specific industry.
Failed the quick ratio.
P/E exceeds growth rate.

Risk Control Techniques Employed
The most important thing about making money in the markets is to realize that youre hunting with a shotgun. That means youll have outliers. If youre wrong, youre wrong. He sells out at a dead-cat-bounce.
Will not put more than 20% in any sector, 3% in any single stock.

Philosophy and beliefs
The proper use of technology today is to gather vast quantities of data from every spot on the globe and distill it quickly into usable buy and sell decisions. He has 21 employees, 50 computers, and satellite receivers.
Its not what we think is going to happen. It is what is actually happening. We are in the reality business.
Gillam uses a "OR" score (a risk reward ratio) to screen out the top 5% of inefficiently priced stocks which have earnings growth rates accelerating. A lag is created between market expectation and earnings performance. Such stocks typically have excess returns for 1 to 5 quarters. It has taken him 20 years to find that these companies have a positive value for the 2nd derivative of the earnings growth rate.
People who buy companies that have a big negative alpha might as well believe in the tooth fairy. We never bottom fish.
Gillams experience suggests about 9% of his universe is inefficiently priced on any given day. His UCLA graduate work shows that if a stock makes a new high on any given day, the probability exceeds 70% that it will make yet another new high in the next 90 days. For new low, probability exceeds 65% for another new low in 90 days.
He ignores value, growth or other approaches, since if a stock outperform because of some criteria, by definition, it will have a positive alpha. Gillam will own it at that time, and not before.

History and other facts
McKinley Capital Management was started in 1988 and based in Anchorage, Alaska. Tanous said, "John Templeton-of-the North".
The typical stock Gillam owned in 1995 made 50 new highs over the year.
He used to work for Boettcher & Co. in Denver choosing money managers based on risk and return.
During earnings seasons, almost 2/3 of his holdings report above the highest street estimates, and much higher than the mean.
Objective in down market is to do no worse than index, and beat the index 2-3 times in up markets.
Uses BFG 9000 to manage several thousand individual accounts. It enable him to sell 100% of chip stocks in less than 10 minutes.
McKinley has 3 portfolios: "anything" cap, mid-to-large cap, international portfolio. McKinley also has a hedge fund called McKinley Select Partners. Total assets under management is US$750M.

Performance Record
31% over 6 years: "For the trailing 6 years ended June 30, 1996, his clients enjoyed annualized returns of 31%." P. Tanous 1997, Investment Gurus, pp. 322



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