Portfolio Management Strategy
We employ a “Top-Down” strategic investment approach in which we make asset allocations and portfolio management decisions based upon our analysis primarily of the economic, interest rate and investment environment, followed by analysis of regions and industries, and finally, analysis of individual companies and securities.
We continually analyze the general interest rate and economic environment and the prospective total returns of investments making our allocations between four general asset classes of cash, bonds, stocks and commodities.
Our asset allocation is driven by fundamental guidelines. We substantially increase our cash allocations during periods of economic overheating when governmental or central bank policies are being enacted to temper economic growth through tax increases or contractionary monetary policies. We also increase cash during periods when market valuations are higher than those that would be expected from earnings growth rates as discounted by current interest rates and interest rate trends and policies.
We increase our weightings of commodities during periods of inflation, economic stress or international crises. This tactic provided us with impressive returns when we sold equities, with the exception of precious metals, during the 2007 credit crunch before it developed into a full blown credit crises.
Accordingly, we also substantially increase bond and stock ratios when the opposite conditions as those above occur, such as tax cuts, expansionary monetary policies, and low market valuations.
In individual security selection, we will use only bonds and paper of investment grade or better and generally use U.S. Treasury bills, notes and bonds. Stocks we select will be liquid and trade on a national exchange and must meet the following criteria. They must have strong financial fundamentals as reflected by balance sheet and income statement ratios. They must have quality product lines as demonstrated by market share or proprietary technology, and they must have a strong management team.
We decrease individual holdings when valuations become higher than what would be expected from earnings growth rates. Individual holdings will be sold entirely when risks are increasing due to deteriorating trends in the financial condition of the company, the quality or competitiveness of its product lines, or the strength of the management team.
Fixed Income Investment Strategy
Strategic targeting of fixed income portfolio duration contributes the most value to portfolio total return by increasing yields, controlling risk and minimizing losses. Increasing portfolio duration in periods of stable or declining interest rates increases income and total return while reducing portfolio duration in periods of rising interest rates preserves income while minimizing risk and losses.
“Duration” is the core of our sensitivity analysis which we use to implement the strategy. A fixed income portfolio is subject to various types of risk, the most important of which is interest rate risk, or market risk. Duration is the most effective tool in managing and controlling this particular risk. Duration is not a measure of risk.
Duration is the best measure of a portfolio’s and a bond’s sensitivity to market interest rate changes. Consequently, it is the core of our sensitivity analysis for the total portfolio, as well as for individual security selection.
The overall portfolio strategy derives from an in-depth assessment of the interest rate environment for each sector of the yield curve. We seek data from a wide range of sources and follow closely daily announcements of economic indicators.
For short-term rates, we evaluate monetary policy in the context of the Fed’s stated goals and policies as well as the economic indicators that the Fed considers important in structuring its policy.
For long-term rates, we use an economic model developed by the MIT Sloan School of Management, where we evaluate the position of the economy in the business cycle. Long-term rates, while sensitive to Fed policy, are also sensitive to government fiscal policy, supply & demand, inflation, currency exchange rates, and foreign trade flows among other economic factors.