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Investment Process

Investment Objective
Risk adjusted performance is the focus that guides us. In the equity portion of a client’s portfolio, we attempt to take less risk than the S&P 500, while attempting to outperform the S&P 500 over the long term.

Our Investment Process
Our style of portfolio management is a “go anywhere” strategy, meaning we may invest in equities, fixed income or cash including any market cap, style, domestic or international. We utilize a clearly defined sell discipline, in addition to a process driven buy discipline. We follow our discipline rigorously because we believe that the most important type of diversification is diversification of investment styles, thus the equity portion invests equally in two methods.

One-half of the equity portfolios are invested in a top-down method. Investments in this portion of the portfolio are selected first by study of the macroeconomic picture, quantitative factors and technical analysis at a sector level. A weight of the evidence process is used to select the sectors for emphasis in this half of the portfolio. Once the sectors have been selected, quantitative and technical research is employed to identify the industries of note within the preferred sectors. An effort is made to identify every publicly traded company within those industries in the “sweet spot”. Fundamental and technical analyses are used to trim the list down to approximately 20 names. If our process does not identify 20 names, we will hold a portion of the portfolio in cash or add to fixed income, currency or precious metals and may use exchange traded funds (ETFs).

We develop the other half of the equity portfolio using a bottom-up process. More than 2000 securities are studied. We recognize that Wall Street analysts are not incented for accurately predicting price changes in stocks. They are incented for predicting future earnings of a company, so earning estimate revisions are often an important clue for the future direction of a stock price. That is why we monitor earnings estimate changes. Those companies whose earnings estimate have been increased two or more times, in a short period of time, are then studied individually using both fundamental and technical research. Our goal is to discover 18 companies to place in this half of the portfolio. Again, if our process does not identify 18 names, we may hold a portion of the portfolio in cash or add to fixed income, currency or precious metals and may use ETFs.

Our sell discipline is two-fold. Each equity held in the portfolio is assigned a sell stop. Sell stops are raised when deemed appropriate, but never lowered. Sell stops are set by a dynamic process. That is to say that the margin between the stop price and the market price will differ from stock to stock and on the same stock at different stages in its growth cycle. In some instances, we will stage out of a position, while in certain environments we will sell the entire position at one time. In the bottom-up half of the portfolio an EPS revision lower will typically result in the sale of the stock.

The equity portion will differ in proportion only, depending on the client risk tolerance and goals. In other words the same stocks are owned in all client portfolios, but in a proportion that is right-sized for the client. For the fixed income portion of a client’s portfolio investments are selected using a rate anticipator style. Fixed income investments will be taxable or tax-free depending on the client’s needs. Typically, investments are made in individual bond issues or ETFs. We only use investment grade bonds.