Seeking businesses with growing free cash flow is a top priority for Janet Navon, the lead manager of CI American Small Companies 
since June 2011.
"We look at companies not only from what their cash is flowing today," says Navon, "but what we expect going forward. They can either be a good old Steady Eddy, like a Microsoft (Corp.) MSFT, or a company where they may have ended a capital-expenditure cycle to redeploy that capital into something new and creative."
Navon is a managing director, director of research and portfolio manager at Epoch Investment Partners, Inc. The New-York based investment management firm, a sub- advisor to CI Investments Inc. and led by Wall Street veteran William Priest, was established in 2004.
Along with managing the Morningstar 3-star rated CI American Small Companies, Navon is the co-manager of CI Global Small Companies . Epoch's approximately $10 billion in total assets under management is invested about half in the United States and half elsewhere.
In keeping with their bottom-up, value-oriented style, Navon and her colleagues at Epoch favour companies that are well financed. The aftermath of the 2008 and 2009 credit crisis in the U.S. created some buying opportunities. "We were able to really high-grade the qualities of the businesses," says Navon, "at valuations that you hadn't seen for some time."
Among the 70 to 90 holdings in the fully invested CI American Small Companies, market capitalization generally ranges from $250 million up to around $5 billion. Because the investment strategy is so cash-flow oriented, some of the holdings have grown up to become mid-cap companies while still meeting Epoch's fundamental criteria.
The mandate is broadly diversified by security, and a 3% weight is considered about the maximum for an individual stock holding in the small-cap area. As for sector exposure, it is rare to go beyond 20% of the overall portfolio in any one sector.
Portfolio turnover in the small-cap mandates tends to be moderate. In either CI American Small Companies or CI Global Small Companies, the annual turnover is between 30% and 50%, says Navon.
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Research for the U.S. portfolio is drawn from a team of seven who also act as analysts. According to Navon, the firm believes that small teams are the best way to manage money because it improves communication between team members.
A graduate of Georgetown University, Navon received a bachelor of science in 1978. Continuing her studies, she earned an MBA from Columbia University in 1981.
Before joining Epoch in 2007, Navon spent nine years as a senior analyst and co-portfolio manager at Steinberg Asset Management. Previously, she was a founding principal of Atlantic Asset Management, where she was responsible for product development, sector strategies and security analysis.
Her experience also includes investment-management positions at Columbus Circle Investors and J.P. Morgan Investment Management where she coordinated quantitative portfolio strategies and product development.
Today, as a member of Epoch's investment policy-group, Navon is involved in researching secular trends and macroeconomic and political trends. In their fundamental analysis of companies, she says, Epoch managers want to understand not only what they think is going to happen, but "how the valuation will be if we're wrong."
Currently, and over the last year, the managers placed a premium on oil-related companies because of the geopolitical situation. One of the names in the portfolio that is considered "fairly unique in oil service" is Oil States International, Inc. OIS, says Navon, since half of its business is accommodation for remote camps.
"The beauty of that business is that it gives you considerable visibility compared to many other oil services that are going to change based on oil prices." As well, "it gives you recurring revenues and profitability in a business that's typically thought of as being cyclical." There is some cyclicality, Navon adds, but the vast majority of Oil States business is considered a good foundation for recurring cash flow.
Looking ahead, Navon says Epoch is expecting slow economic growth over a multi-year period. "We've positioned the fund in businesses that we think will do well regardless," she says. "We have some exposure in auto parts, we have some exposure in U.S. housing, where we're seeing pent-up demand actually being acted on."
