We employ a dynamic but risk-averse strategy predicated on the belief that long term results are best achieved by the compounding of gains and the avoidance of major losses. We attempt to limit downside exposure as much as generate upside returns. We avoid “the style box” trap and focus on quality companies diversified across all market sectors and all market capitalizations. We place an emphasis on sectors that we believe will outperform the general market and are appropriate for our clients. We also allocate 5-10% of the equity portfolio into “opportunistic situations”. As a firm we are large enough to recognize economies of scale for our clients but small enough to take niche positions.
Generally our equity portfolios contain range 20-25 core holdings. We believe this is appropriate since investing in more than 25 core holdings limits the benefit of value-added research and stock selection thereby potentially only generating a return comparable with the market indices. Having fewer than 20 core holdings, risks creating an unduly concentrated portfolio that could be vulnerable to weakness in any single stock.
We focus on high quality companies that are well managed and generally possess a sustainable differentiating competitive advantage. A competitive advantage includes providing a superior product or service /having the leading market share, being the low cost producer, possessing a better distribution system, utilizing better technology or research, offering the best customer service and strong free cash flow.
Importantly for taxable investors the total return on our equity portfolio relies more on price appreciation and less on dividend yield than does the S&P 500. We prefer companies with strong free cash flow that can reinvest their earnings at high rates of return, thereby rewarding shareholders through price appreciation instead of taxable dividends.
In our opinion a client should evaluate our performance over a minimum three year period. Besides the quantitative aspect, a client should review qualitative considerations such as adherence to stated objectives and communication.