Institutional Philosophy:

The philosophy for our six unique managed portfolios is based upon relative value and sector choice. We seek out stocks that meet our criteria for solid relative value (GARP) based upon P/E, P/S, and P/CF ratios. When choosing among the various sectors of the economy, our firm focuses on two specific criteria;

1. Superior historical investment returns
2. Low correlations

In examining the past performance of the major sectors, three maintained superior performance over the S&P 500; healthcare, technology, and financials. These three sectors all significantly outperformed the S&P 500 stock index for the 25-year period ending December 31, 2003. All the other major sectors had annual returns below that of the S&P 500 stock index. Due to this impressive performance, we utilize these three sectors for a large component of our client global portfolios. 

We have also added another sector to our recommendation. Our fourth recommendation, energy, is not based upon superior return, but primarily for its risk benefits. Energy stocks provide an excellent choice based upon their low correlation to the other three sectors. They also provide a portfolio hedge against inflation. Inflation has an adverse impact on the stock market. In the last two periods of high inflation (1974, 1979), stocks performed very poorly. We therefore view the energy sector as a key ingredient in a diversified global portfolio. Our goal as portfolio managers is not only to deliver superior returns to our investor, but also minimize risk. One advantage of investing in our four recommended sectors are the low historical correlations that these four sectors possess.

The highest correlated sectors are the healthcare and financials; with a 0.64 correlation. This is considered moderately high. However,all other correlations within the four sectors are at a 0.45 or less. Some relationships are exceptionally low. Healthcare and technology have a minuscule 0.07 correlation. Energy and healthcare have a diminutive 0.19 correlation. These low correlations mean that although these sectors offer high performance, they do so at different times. Therefore, if healthcare stocks do exceptionally well, one or more of the other sectors is most likely doing poorly. This see-saw relationship actually lowers volatility. Due to these findings, these four sectors, in combination, offer our institutional investors the best opportunity to outperform the stock market averages. Our offered portfolios for high-net worth individuals, separate account programs, and institutional pension clients utilize this distinctive sector approach. Approximately 75% of each portfolio is invested in these sectors. The balance (25%) is invested in other sectors of the economy that we believe offer the most value. We believe our unique investing approach gives us the best opportunity to outperform the general index benchmarks. Since inception, all of our managed portfolios have outperformed their respective index by a wide margin. We expect that our keen insights will allow us to continue this outperformance.

Investment Process

Investment ideas are generated through a screening process. First, our firm screens our primary sectors according to historical relative value. The primary screening methods are historical price/sales, price/book, and price/earnings ratios. We divide each sector into four quadrants. The first quadrant possesses those securities that maintain the lowest price/sales and price/earnings ratios compared to their own historical range. The fourth quadrant contains those that have the highest price/sales and price/earnings ratios compared with their own historical range. Our investment choices will come from each sector’s quadrant one selections. Once these candidates have been identified, we then explore each company in detail to access potential. We utilize both internal and external research sources. Wall Street research from the major brokerage houses is utilized for an overview of outside opinions and market expectations. Our own internal research then is initiated beginning with an in-depth 10k/10q review. Assessments are made in regard to the quality of the company, management, and financial capabilities. Earnings and revenue projections are made, and stock valuation appraised.

All stocks within the quadrant one fields are placed on a watch list. We will set our target buy price for each of these securities. If the stock meets our target price, then it is a potential buy candidate. It will only be purchased, however, if several other parameters are met. One, the sector of the buy candidate is viewed favorably by our firm. Second, the sector is not fully weighted (i.e. healthcare at 30%). Third, there is ample cash for purchase, or another stock is to be sold in the portfolio. Stocks are sold out of the portfolio generally for the following reasons; One, stock met target price. Second, stock valuation enters the third or fourth quadrant of screening within its sector. Third, any accounting irregularities. Fourth, a major change of leadership or strategy at the company.

Our two portfolio managers and one equity analyst are the primary decision makers for each portfolio. Ideas are generated through the screening process and discussed and analyzed during investment committee meetings. The actual decision to buy or sell in each portfolio is authorized by the lead manager.

Additional Comments

Our U.S. Growth Leaders,  U.S. Value Leaders,  Global Core Leaders, International Leaders, and Absolute Return Hedge Portfolios are typically invested in 30-40 stocks.  The portfolios are a large-cap offerings that follows a GARP approach. Portfolios are constructed by sector weights, then stock selection. Guidelines to our preferred sector weights are as follows; Healthcare (20-30% range) Financials (15-25%), Technology (10-20%), Energy (10-15%). Other sectors account for 25% of the portfolios weight. Within this 25%, not more than 10% can be devoted to any one sector. Minimum market capitalization is $5 billion for any potential equity selection. Cash will not exceed 10% of portfolio. Turnover averages less than 25% per year.