Our equity strategy is best described as “GARP”, or growth investing at a reasonable price. Relative and absolute valuation disciplines are applied to specific companies, sectors and industries in the stock selection process. We tend to own only fundamentally superior, industry-leading companies characterized by revenues, earnings and dividends (where applicable) that can grow at above-average rates. This is typically associated with established companies that enjoy conservative capital structures, financially motivated managers and employees and proprietary products or services that provide significant barriers to entry.
We use a “top down” (industry focus) for selecting equities. Stock prices of companies in any given industry tend to move in the same general direction for multi-year cycles, irrespective of the market’s general level or trend. Fundamentally superior, industry-leading companies tend to perform relatively better than their peers given their more favorable competitive positions. However, stock market leadership invariably changes over time. Experience has shown that industries and stocks that have under-performed the “averages” and current market leaders for a number of years typically outperform them in the future…and vice versa.
Since the stock market tends to be very “efficient” over longer time horizons, prices will accurately reflect companies’ long-term fundamentals and intrinsic values. However, it tends to be very “inefficient” over shorter time horizons. This is because short-term pricing of stocks is greatly impacted by human emotion – greed (optimism) and fear (pessimism). An understanding of these market dynamics can greatly enhance opportunities for superior relative investment performance.
The prevailing fixation with short-term results by most investors can create opportunity for patient ones with a long-term focus. We prefer to make equity investments when recent disappointments or short-term dislocations are already “priced” into the stock. Thus, the likelihood of further downside risk is greatly reduced. In our experience, some “popular” stocks with high expectations (but perhaps weak competitive positions) can be viewed as more “risky” investments if these expectations are not ultimately realized. Investors need not take extraordinary risks to achieve exceptional long-term returns.
The company’s “sell” discipline for a particular stock is triggered by a perceived permanent change in fortunes resulting from financial, economic, demographic or competitive trends or developments that may limit future appreciation potential or expose the client to unacceptable levels of risk for permanent capital loss.
We identify companies with promising long-term prospects and plan to own them for a period of at least 3 to 5 years, on average. This implies an average annual portfolio turnover rate of 20 to 30 percent. Excessive trading that results in short-term gains or losses is not practiced, though there are circumstances when an equity position may be held less than one year. We do not employ strategies such as “momentum” investing which emphasize short-term ownership and excessive trading in stocks with positive price action. If our assessment of an individual company or industry is correct, our clients should be commensurately rewarded over a period measured in years, rather than months or quarters.
We do not engage in market timing strategies. Many authoritative studies confirm that excessive trading or attempts to “time the market” are exercises in futility that can have an adverse impact on long-term investment returns. We do not utilize options, futures, derivatives or other strategies to “hedge” against market risk
Technical analysis is employed to help us “fine tune” our purchase and sale disciplines for individual equity investments. Stock price action that deviates markedly from a particular benchmark or industry composite is a “flag” that requires review and evaluation relative to the original investment thesis. We do not employ “price targets” for purchases or sales, but feel that technical analysis can be a valuable tool when used in conjunction with rigorous fundamental research for helping to manage risk.
Fixed-income management focuses particular attention on capital flows, monetary conditions and economic trends. This includes monitoring the important factors that affect the economy and consequently the level and direction of interest rates. Portfolio duration and average maturity decisions are also driven by these disciplines. The investment merit of fixed-income investments is also evaluated relative to that of equities in determining asset allocation for “balanced” portfolios where a particular income requirement is not specified.
Broad portfolio diversification is practiced to reduce non-systematic (company-specific) risk and lower overall volatility. Equity portfolios will typically contain from 30 to 40 individual stocks in 15 to 20 distinct industries. Fixed-income portfolios may contain as many as 10 to 20 different bonds – diversified by maturity, issuer, sector and industry. As a general rule, each holding qualified for purchase will not exceed 3 percent of the total portfolio with a concentration in any one industry not exceeding twice that of its overall market “weight”.
We are committed to keeping trading costs, administrative expenses and capital gains taxes to a minimum to enhance client “net” returns. Decisions regarding investment policy and security selection are made by committee through a majority vote of the investment practitioners in the firm. Investment decisions are applied consistently for each client, subject to the objectives and constraints of each particular portfolio. Once an equity or fixed-income investment is qualified for purchase, it is continuously evaluated relative to the factors that constituted the original investment thesis. If that combination of factors continues to be valid, the investment will be retained indefinitely within the prescribed constraints of the portfolio discipline. The Investment Committee usually meets at least monthly. The minutes of these proceedings and any evidentiary materials are retained and documented for future reference and review.