A balanced portfolio format offers advantages both to the manager and to the client. For the manager, being able to use all three components of the portfolio construction — stock selection, bond selection and asset allocation — allows for flexibility that produces more consistent returns. For the client, such as an endowment, having a balanced manager can add value because the pivotal asset allocation decision is reviewed continuously by a professional investment organization rather than part time by an investment committee. While providing substantial manager flexibility and oversight, this framework does allow investment committees to set constraints on asset allocation.
In equity investing, better than average company earnings and dividend growth over the long term generally produce the best returns. Hence, we dedicate much of our work to identifying factors likely to cause such growth for both individual companies and for sectors of the economy.
However, we recognize earnings and dividend prospects cannot be considered in a vacuum. They must be related to the price of a security, to similar investments and to alternative investments, including risk-free bonds. Accordingly, we quantify the prospective performance of various classes of assets at any given time, then use these anticipated returns as a frame of reference for constructing our portfolio.
We rely heavily on a research-intensive, tire-kicking, company-by-company approach to ascertain the key underpinnings driving long-term growth. As we own stocks for at least three to five years on average, a close understanding of what makes a company tick is particularly important to us.
No magic formula exists for investment success. Indeed, past successes often seem to sow seeds of their own destruction. We distrust dogma and try to remain flexible. In addition, we maintain portfolio diversity to dampen volatility. Our long-term goal is to provide clients with a growing stream of income while, at a minimum, maintaining the purchasing power of their capital.
In bonds, normal interest rates, sector valuations and individual security research drive our process. The relative importance depends on position in the interest rate cycle. Our turnover tends to be low. We use foreign currency bonds when we believe they are appropriate. The overall quality of our bond portfolio has been consistently high.