Martin Sass manages $7 billion at M.D. Sass, the New York–based investment firm he started in 1972. When he’s not picking stocks, he has a sideline: seeding investment managers.

During the past 42 years, he’s helped launch and nurture 29 hedge funds, private-equity vehicles and investment strategies that oversee more than $30 billion, by his reckoning. “I did it before I even knew it was an incubator,” Sass, 72, says.

Among the firms Sass has invested in are Waterfall Asset Management LLC, an asset-backed hedge fund, and Amerra Capital Management LLC, a private-equity firm focused on agricultural commodities.

M.D. Sass now has a team of five people who scour Wall Street for talented managers and winning strategies, Bloomberg Markets will report in its February issue. Often, deals start with a couple of people who need capital and infrastructure to get an idea off the ground, Sass says. He meets with them to hear about their strategy. “Usually in the first 15 minutes, I can determine whether I’m going to be interested,” he says. “If we like what we see, we’ll seed them with capital and then grow it,” he says.

In 2006, the firm formalized the process of building and spinning off strategies in a partnership with Australia’s Macquarie Group Ltd. One of M.D. Sass-Macquarie Financial Strategies LP’s early investments was in New York–based Waterfall, which specializes in high-yield asset-backed securities and managed $3.7 billion as of July. Other ventures include New York–based Amerra, which manages about $1.1 billion, and HighTower Advisors LLC, a Chicago-based wealth management company.

Concentrated Bets

Even as he profits from others’ success, Sass tends to his own bottom line. A good stock picker can beat the market, he says, and M.D. Sass has done that. The firm’s flagship Relative Value Equity strategy, with $1.5 billion in assets, returned an average of 9.9 percent a year from 1999 through November 2014, which adds up to a cumulative 349 percent, according to the firm. The Standard & Poor’s 500 Index returned 126 percent, including reinvested dividends, during the same period.

Sass concentrates his bets to get those returns. The strategy typically holds shares in about 30 companies, rejecting the view that more diversification is safer. “We actually think that’s a riskier strategy,” Sass says. “You can’t really have an edge on hundreds of stocks.”

Crucial Cash

Sass hunts for a few stocks with exceptional attributes: “the kind of characteristics that lead to outperformance.” First among them is value. Sass and his five-person investment team screen for stocks that trade at least 20 percent below what they deem to be fair value. From there, growth is key. On average, earnings at companies in the strategy expand at two to three times the S&P average, he says. Then there’s cash flow, a crucial characteristic of a healthy company. “Of all the accounting gimmickry that companies can use, the one thing they can’t fake is cash flow,” Sass says.