We provide both investment management and wealth management services to clients throughout the world. 

Our primary investment management goal for our managed equity, bond, and ETF portfolios is capital preservation. We attempt to build diversified portfolios that can withstand the worst of stock and bond markets. Our ability to protect capital is based upon asset allocation and within our equity portfolios; low price/sales, sector, and dividend growth concentration. Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a key element of our investment process. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk

 Our investment team utilizes a process known as factor investing. Factor investing has its roots in academic research from the 1960s.  Harry Markowitz's CAPM "capital asset pricing model" was published in 1964.  Markowitz postulated a factor, beta, or a stock's volatility relative to the index, as critical to a stock's returns. He indicated that expected stock returns should be positively related to their systematic risk, measured by beta, which is the only factor that should influence expected returns.  The model became followed quickly by both the academic and investment community.  Since the 1960s, multiple factors have been identified by academic researchers, most notably the size, value, momentum, leverage, sector, yield, and low volatility effects.  Recently, factoral analysis has become a more intriguing concept as several large pension funds have adopted factor analysis as a strategy to improve investment returns.  One influential study produced on factor analysis was recently conducted for Norges Bank Investment Management (NBIM), which is the largest pension fund in the world.  The study's authors; Andrew Ang (Columbia Business School), William N. Goetzmann (Yale School of Management) and Stephen M. Schaefer (London Business School), published data that indicated that nearly 70% of all active returns to Norway's NBIM since its inception in 1998 could be explained by exposures to various factors. Our focused goal for our managed equity portfolios is to utilize factor analysis to provide excellent risk adjusted returns for our clients.  We have preference for utilizing three primary factors in an attempt to outperform our benchmark index over time with less risk as measured by standard deviation.  Our preferred factoral criteria include;

Low Price/Sales Ratio Factor

 Evidence has accumulated over the preceding two decades that excess returns may result from investing in those firms that maintain low price/sales ratios versus the market. Professors A.J. Senchack and John D. Martin in “The Relative Performance of the PSR and PER Strategies,” Financial Analysts Journal (1987) compared the performance of low price-sales ratio portfolios with low price-earnings ratio portfolios, and concluded that the low price-sales ratio portfolio outperformed the market but not the low price-earnings ratio portfolio. Professors Bruce Jacobs and Kenneth Levy (1988a) tested the value of low price-sales ratios (standardized by the price-sales ratio of the industries in which the firms operated) as part of a general effort to disentangle the forces influencing equity returns. They concluded that low price-sales ratios, by themselves, yielded an excess return of 0.17% a month between 1978 and 1986, which was statistically significant. The low price sales factor is within the overall value factor framework.  We have found the price sales ratio to be a better valuation tool than other value factors.  

Sector Factor

 The four sector investment strategy is another factor based on empirical research undertaken by the firm’s founder Timothy McIntosh.  His findings concur with better well-known research namely papers published by Jeremy Seigel of the University of Pennsylvania & Richard Thaler of the University of Chicago. In examining the firm’s sector investment philosophy, studies were completed that concluded that only 4 sectors consistently produced superior performance over the long-term and that there are predictable cycles in the price movements of equities.  The data (from Lipper) was presented in the recently released publication The Sector Strategist, Wiley Publishing by Mr. McIntosh.  His examination of the Lipper Mutual Fund Data over a twenty-four year time frame from 1986 to 2011 found that only four sectors, healthcare, energy, technology, and financials, produced superior returns over that of the benchmark S&P 500 stock index. All other sector had returns below that of the index.   This return data was supported by larger well known research completed in the past ten years.  The most notable was a study performed by Jeremy Seigel of the University of Pennsylvania .  

 In March 2005, Dr. Siegel published a book titled The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New.  In the publication, Dr. Siegel found five sectors have outperformed the S&P 500 during a period from 1957-2003.  These five sectors were healthcare, energy, consumer staples, technology, and financials.   Dr. Siegel’s work thus was confirmed by our own internal study.  However, our investment strategy does not incorporate consumer staples as feel the healthcare sector provides enough “defensive capability” within our own internal investment strategy.  Furthermore, the consumer staples sector has not performed as well since 1986 (according to the Lipper data) as it had in the two previous decades.   

The attributes of our four favored sectors are not just limited to performance.  Healthcare stocks offer a strong defensive characteristic and have historically held up well during period of market turmoil.  Energy stocks provide an excellent choice based upon their low correlation to the other three sectors. Energy stocks 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.

 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 indicate these sectors offer high performance, but do so at different times.  In light of this, SIPCO’s portfolios focus on the four sectors highlighted.  Approximately 80% of our equities are invested in these four sectors. This compares with equivalent weighting as of 03/31/12 of the major indices of 58% for the Russell 1000 Value Index, 56% Russell 1000 Growth Index & 58% for the S&P 500 Index. A major positive attribute of focusing on these four sectors is the production of excellent risk-adjusted returns.       

Dividends Growth Factor

Our third factoral criteria is growth of dividends.  Over the years, stocks of companies that initiate and consistently grow their dividends have outperformed the broader market, and have significantly outperformed stocks that cut or don’t pay dividends. This is known as the dividend growth effect.  Once a company enters a cycle of increasing dividends, it is highly motivated to maintain the trend. It is constantly under pressure to increase profits and cash flow every year, because if it doesn’t, it will be forced to decrease or suspend its dividend, which usually leads to a sharp sell-off in the stock. Management works hard to avoid hurting the stock price since they are often paid in stock options. The best indicator of a company’s ability to grow its dividend in the future is typically its track record of growing it in the past. A low payout ratio, the ratio of dividends to earnings, is also an indicator of a company’s ability to grow dividends. Companies with high dividend yields may find their dividends unsustainable during difficult times, exactly when investors need the income stream most. Companies with a history of growing dividends have proved they can not only sustain but also grow dividends, even during down markets. From a portfolio management perspective, dividend growth portfolios can be well diversified since companies steadily growing their dividend tend to exist across various sectors.  Our favored sectors; Healthcare, Energy, Technology, & Financials, have a plethora of companies that grow dividends in a consistent manner.  This is an advantage over portfolios focusing solely upon highest dividend yields, which tend to be concentrated in mature sectors like utilities and, prior to 2007, financials.  Today, dividends are as important as ever, and by many measures dividends look to be cheap relative to the income available in bonds. 

Quadrant Box Investing

The first quadrant possesses those securities that maintain the lowest price/sales ratios compared to their own historical range. Within this sector, several "fallen angel" candidates will appear.  The fourth quadrant contains those that have the highest price/sales 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.  Furthermore, only those firms with a strong history of increasing dividend payments will become candidates for inclusion.  

All stocks within the quadrant one fields are placed on a watch list. We will set our target buy price for each of these "fallen angel" 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 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 Commentary:  Our equity portfolios are typically invested in 30-40 stocks.  The portfolios are  large-cap offerings that follow a low price sales + dividend growth process combined with our unique quadrant box investing approach. Equity portfolios are constructed by sector weights, then stock selection. Guidelines to our preferred sector weights are as follows; Healthcare (15-35% range), Energy (10-30%), Technology (10-30%), Financials (5-25%). Other sectors generally account for 10-20% of the portfolios weight. Within this portion, not more than 10% can be devoted to any one sector. Minimum market capitalization is $8 billion for any potential equity selection. ADRs typically account for 10% of our portfolios. Cash generally does not exceed 10% a stock portfolio. Turnover averages less than 20% per year.

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