Portfolio Rules

Daruma invests within a clear set of rules about portfolio concentration and diversification, valuation and the sell discipline — and, most important, rules about paying attention and acting decisively when necessary:

How not to copycat the index

  • Own no more than 35 high-conviction holdings
  • Invest in a potential upside/downside of at least three to one
  • Invest in a potential upside of at least 50% over a two-year period
  • When a holding declines meaningfully, sell or buy more within 90 days
  • Do not manage to sector benchmark weights
  • Make every holding count by starting with a 2% position

How not to inflict mortal wounds on the portfolio

  • Know what you own
  • Don’t overpay
  • Never let any one holding grow to more than 6% of the portfolio
  • Own no less than 25 high-conviction positions
  • Cap our sectors at 25% of the portfolio or two times the Index weight, whichever is greater

The resulting portfolio combines strong return potential with risk control not dependent upon index-hugging. In our longest-running product, the small-cap strategy portfolio turnover has averaged 40% annually since inception; cash typically runs between 3% and 5%, and our top ten positions range between 35% and 40% of the portfolio.

A portfolio is more than just an assortment of stock picks; it becomes an ecosystem — an environment where every organism interacts with and is dependent upon every other organism. The health of the portfolio therefore must be monitored systematically, assessing risks not only at the individual stock level, but also aggregated across the entire portfolio. We always need to make sure that the portfolio has the right mix of new ideas with developing ideas as well as the right balance of risk with opportunity.

The 12-stock rule

  • The overlap between the small- and SMid-cap portfolios will be no more than 12 holdings
  • These holdings will be among the larger-cap and more liquid positions
  • Daruma does not want to own more than 10% of a company’s shares outstanding