Q & A with Jeff Kautz and Randy Hughes

Jeff Kautz and Randy Hughes co-founded QSV Equity Investors in 2016. More important
to their clients may be the fact that they have invested together for over twenty years.
Previously, the two worked together at Perkins Investment Management, a subsidiary of Janus
Henderson Group, where Jeff held roles including Portfolio Manager, CEO and Chief Investment
Officer and Randy held the roles of Director of Research and Analytics and Equity Analyst.
Assets under management during Kautz’ and Hughes’ tenures at Perkins grew from $30 million
to over $20 billion at the peak.

Q: Jeff, you and Randy have invested together for more than 20 years, including your time
at Perkins. What qualities do you insist on building into the culture of your new firm, QSV 
Equity Investors?

A: (Kautz) Randy and I have worked in small, entrepreneurial firms and in large, publicly
traded companies. We believe the culture we are creating at QSV, a small, employee-owned
firm, is the best approach to align ourselves with the interests of our clients. We invest
significant sums of our own liquid investments alongside those of our clients and we focus our
efforts each day on building portfolios of quality businesses to meet the investment needs of
those clients. We love what we do and we’re here for the long term, without pressure to
deliver short-term business or investment results.

Q: Talk about your investment philosophy and process.

A: (Hughes) QSV Equity Investors holds an investment philosophy grounded in four
core beliefs. First, we believe that many small-cap companies are underfollowed by the
marketplace resulting in overlooked investment opportunities while mid-cap companies, albeit
more established than small caps, offer better prospects for growth than large-caps especially
when purchased at reasonable valuations. Second, we believe that investors often overpay for
stocks of low-quality, high-beta companies, overlooking opportunities in more stable, higher-
quality businesses. Third, we know that compounding is powerful; investors will build lasting
wealth through a strategy that protects during down markets and participates in rising markets.
Finally, we understand that patience is essential to investing success, but hard in practice.

A: (Kautz) QSV employs a research and screening process that includes four distinct steps:

1. QSV begins by charting the ratio of Enterprise Value to Invested Capital relative to the
Return on Invested Capital (ROIC) for a universe of 3000 small and mid-cap stocks. This is
done with the theory that an investor should be willing to pay more for a business that
earns high returns on invested capital. QSV considers those businesses whose stocks
appear to be undervalued and excludes those businesses that appear overvalued in this

2. Next, we employ quantitative analysis that, we believe, is one way that QSV
differentiates itself from competitors. The team rates stocks in its universe according to
its proprietary Quality Rankings Model, using factors including leverage, interest
coverage, stable and growing cash flows and stable and growing Returns on Invested

3. After ranking businesses using the Quality Rankings Model, QSV does considerable
qualitative analysis, focusing on those stocks that rank in the top two quintiles of its
universe. QSV believes strongly that high returns on capital are maintained and
defended through proven, durable competitive advantages, such as economies of scale,
strong intangible assets, high switching costs, network effects and cost advantages.
QSV professionals use a combination of proprietary research, third-party research,
regulatory filings and other publicly available company information to assess the
durability of competitive advantages for each business.

4. Strong quantitative scores from the Quality Rankings Model and durable competitive
advantages may result in a portfolio of well-performing, high-quality businesses, but
QSV strongly believes that valuation plays a vital role in successful investing. Team
members have used many valuation tools in their history of working together, but believe
that a calculation of economic profit considers the capital allocation decisions made by
business management and allows QSV to answer its primary question: “Does the
company create wealth for investors over time?”

Q: Has your process changed since your tenure at Perkins? If so, how?

A: (Hughes) At Perkins we always owned companies that had strong balance sheets, but
cheap valuation was the primary and foremost consideration. We were buying cheap companies
that had problems with the hope those problems would get fixed over time. At QSV, It’s not
enough to sift through cheap stocks in search of a good business; we want to begin with good,
high-quality businesses, supported by durable competitive advantages, and then have the
patience to invest in them when the market gives us the opportunity to buy at a discount to the
future economic profits that the company will produce. Warren Buffet always says that It’s far
better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Q: Your process focuses on quality companies and downside protection. Tell us about how
you feel these priorities work together?

A: (Hughes) Investing in quality businesses and our emphasis on downside protection work
together, without a doubt. There are many examples we could give, including looking into the
performance of businesses ranked by our own proprietary Quality Rankings. A quick answer,
though, is to look at the performance of the Russell 3000 Defensive index (to represent high
quality companies) versus the performance of the Russell 3000 Dynamic index (to represent
low quality companies). Between February 2007 and the end of March 2019, the high-quality
companies represented here dropped 3.3% in down markets, outperforming low quality
companies that fell, on average, 5.1%. Importantly, high quality companies, as represented by
the Russell 3000 Defensive index, have also outperformed lower quality (Russell 3000 Dynamic
index) companies over a full market cycle, with less risk. Indexes and quality measures aside,
we also believe we can mitigate risk through careful attention to valuation; only buying quality
businesses when we believe they are trading at discounts to the economic profits of those

Q: As a small team, how do you make portfolio decisions?

A: (Kautz) First a comment on the “small team” dynamic at QSV: Randy and I have worked
together for more than twenty years. We are a small team, yet the experience we each have in
researching and investing in small and mid-cap companies and the experience we have investing
together is significant. Investing is a craft where you can learn and get better over time and we
believe we have. We make decisions together, with full agreement, or we pursue other
opportunities where we can reach consensus.

Q: Where should an investor position your strategies in their portfolios?

A: (Hughes)We insist on owning quality businesses and seek to buy their stocks at a
discount. We are value investors. That said, we are not deep discount value managers and,
due to our conviction in the businesses, some of the stocks we own may trend toward the
growth style over the time we own them. It’s fair to consider us as a relative value manager
and we can serve as the “QSV” in a client’s portfolio that also holds a more aggressive growth
manager. We also can serve as a complement to a deep discount manager on the value side of
the menu.

Q: What else should investors know about you and QSV?

A: (Kautz) We enjoy working together and love what we do. The independent, employee-
owned structure of our firm permits us to be patient and take the long view, both with respect
to our investment portfolios and with our business decisions. We know that our clients have
many options when they seek out investment firms and we’re grateful to work for them.


No client or potential client should assume that any information presented should be construed
as personalized investment advice. Personalized investment advice can only be rendered after
engagement of the firm for services, execution of the required documentation, and receipt of
required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC is a registered investment advisor. For additional information
about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov

Russell US Stability IndexesTM are style-based benchmarks that offer more detail and specificity
for investors, and adds a third dimension to the Russell US Style Indexes, independent from other
definitions of style (i.e. growth and value). The indexes measure a portion of the market based
on the sensitivity to economic cycles, credit cycles, and market volatility, referred to as stability.
Stability is measured at the company level in terms of volatility (price and earnings), leverage,
and return on assets. The more stable half of the index is called the Defensive Index® and the
less stable half is called the Dynamic Index®.

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