Investment Process

Idea Generation

The managing partners of Level 3 Investment Management have over 70 years of combined investment experience to draw upon. We cast our net broadly in search of investment opportunities and have structured the Fund with a flexible mandate to allow this. We focus our efforts on areas we understand while also working to expand our circle of competence. With the flexible mandate of the Level 3 Fund we are able to consider most publicly traded securities in a broad range of geographies and market capitalizations.


What We Look For

We are looking for businesses, securities and situations that we understand or are well positioned to understand with effort. Level 3 is also looking for durable businesses or assets where we can make informed estimates on future earning power and valuation. We are attracted to long product life cycles, limited competition, attractive ROIC (indicating favourable economics and prudent capital allocation), strong financial positions, security of covenants and unique assets. Value needs to be underpinned with future cash flows or asset values. 


The alignment of interests at investee companies between management and shareholders and proper incentive structures is critical along with “skin in the game” or insider share ownership. In all securities we purchase for the Fund we are looking for a margin of safety and to ensure that the Fund is being compensated more than adequately for the risks being taken. The process is based on estimates, is probabilistic and with much consideration of what could go wrong; in the business, security, economic or political environment or our estimates. While some investors will actively avoid neglected securities or sectors of the market, Level 3 finds opportunities worth examining as a result of that neglect. Securities are not examined in isolation but also in terms of how they complement the existing portfolio in terms of diversification.

Ongoing Monitoring and Review

Research does not end after a security is purchased.  Instead it is an ongoing process to further understand the business and / or security and other factors that may impact the Fund’s performance.


Sell Discipline

As important as the purchase decision is the decision to sell or not to sell. Informed opinion allowing one to relate trading prices to valuation are the primary basis for this. Changes in the macro-economic environment, industry / competitive conditions, corporate operating or financial conditions are all factors to be considered. 


Reasons for selling a security include:

  • Recognizing relevant changes in the macro-economic environment, industry / competitive conditions, corporate operating or financial conditions.
  • Security prices reaching levels that reduce return expectations below levels required for risks taken on.
  • Detecting changes or recognizing a mistake in earning power or value estimates. 
  • Identifying a more attractive opportunity, in the form of higher expected return or greater margin of safety.

The goal is to protect capital and then compound that protected capital.


Risk Management

Risk management is not a discreet step in the investment process but is integral throughout the process. We seek to protect capital and to compound that protected capital. Understanding a business, security and situation is critical. Research, knowledge and curiosity underpin this understanding. Real diversification in an economic sense is what we strive for. A key to understanding a business or security is to understand what can go wrong. The macro-environment and cyclical factors need to be incorporated into the analysis. Investing is a probabilistic pursuit and needs to be recognized as such. While we focus on bottom-up security selection, macro-economic analysis is incorporated for risk management purposes and avoidance of excessive exposure to systemic risks.