The Efficient Alpha Capital (EAC) Indexes leverage years of Private Equity investing experience to develop a differentiated approach in creating portfolios of public equities. The EAC Indexes are designed to identify companies with superior fundamental financial characteristics that are trading at reasonable valuations.
There are currently two strategies in the Efficient Alpha Capital family:
Efficient Alpha Capital Deferred Revenue Index
Includes companies that receive payments from customers before delivering their product / service, in contrast to most companies that are only paid weeks or months afterwards. This results in a superior cash flow profile, while also signaling strong competitive differentiation.
Efficient Alpha Capital Free Cash Flow Index
Focuses on companies with strong Free Cash Flow characteristics. Free Cash Flow is a powerful financial metric that incorporates a more comprehensive view of a company’s financial profile, including Capital Expenditures and Working Capital needs.
The Efficient Alpha Indexes serve as fair, impartial and transparent measures of the performance of companies using the financial and business characteristics identified in their methodologies, with a valuation overlay to exclude companies that may be over-valued.
Key defining factors include:
The Efficient Alpha Capital Indexes seek exposure to companies with superior financial and business characteristics, in contrast to traditional market indexes that are agnostic to the financial and business characteristics of their component companies. The EAC Indexes are also differentiated from non-market cap weighted indexes given their foundation in Private Equity investing, which requires a level of thoughtfulness and rigor with respect to financial analysis typically not found with public market investors due to the illiquid nature of Private Equity investments and longer hold periods.
Although the Efficient Alpha Capital Indexes are focused on identifying companies that have superior fundamental financial characteristics, the methodologies do include valuation criteria to protect against inclusion of companies that may be too richly valued.
The Efficient Alpha Indexes depend on clearly defined rules-based methodologies, which are overseen by an impartial Index Committee. Little discretion is exercised in compiling the Index, and a pre-defined screening protocol ensures a consistent, transparent and arms-length compilation process. The "Efficient" in "Efficient Alpha Capital" is due to this rules-based approach, which avoids the substantial costs associated with human stock pickers.