Security Capital Management's Investment Approach
Primary investment goals - Once we have become acquainted with you and your investment needs and objectives, we will custom-tailor an investment portfolio to meet those needs. Our primary concerns in investing your money are:
• Preservation of capital
• Preservation of purchasing power (protection agains inflation)
• Wealth accumulation
Asset allocation - In achieving these three goals, we focus our attention on the financial condition (cash flow, debt and quality of assets) of the cpmpanies whose securities we purchase. While diversification is necessary to control and manage risk, we believe that, over time, equities have provided investors with greater opportunities for capital appreciation. This is illustrated in the chart below.
click chart to view large version
Emphasizing equities (stocks) while diversifying among other asset classes, such as fixed income, preferred stocks and carefully selected bonds, serves to dampen volatility in your portfolio while reducing risk and providing you with income.
Most of our accounts will contain fixed income and cash components to complement equities. However, only an ongoing review of your objectives and changing circumstances, in light of current domestic and global economic conditions, will determine your specific asset allocation.
Security Capital's Investment Process - Client portfolios typically contain between 25 and 35 companies diversified across a variety of industry sectors.
Security selection - In choosing specific investments, the challenge is to select securities of financially sound companies, and to buy them at a price that is below their intrinsic value. This provides a "margin of safety" on the downside and significant upside price appreciation potential.
The "Buy" Decision - SCM's "Points of Convergence" Adds Unique Value
Security Capital applies both Fundamental Analysis and Technical Analysis. When the fundamental factors and the technical indicators converge in pointing toward a positive conclusion about a company, we classify its stock as a potential "Buy".
Fundamental Analysis selects companies that possess:
• Strong financial condition (cash flow, revenues and balance sheet)
• A long history of predictable and consistent earnings growth in both good and bad economic conditions
• Potentially undervalued assets or a pipeline of superior or unique products
• Dominant or leading market share
• Outstanding management that is shareholder friendly
• Earnings per share (EPS) growth rate that is above industry peers
• Price-to-Earnings (P/E) ratio that is below industry peers
Technical Analysis selects companies with:
• Market price in or beginning a stable upward trend
• Strong stock price performance relative to its industry group and the overall market
• Positive catalysts supporting further EPS growth and price appreciation
• The sales volume of the company's stock moves higher as the price increases and moves lower when the price declines as an indicator of favorable underlying support for the stock.
Sell Discipline - Before SCM's portfolio managers buy any security, we estimate the eventual price at which it will be fully-valued and should be sold. When the stock reaches that price level we review the fundamental and technical position of the company relative to its industry, the overall market, and the economy.
3 Reasons to Sell
1. Price appreciation: A stock has so outperformed the market that its potential for further increases is limited and it has become overweighted in the portfolio due to its high price.
2. Fundamental Deterioration: A significant fall-off in the business prospects of a company indicated by slowing earnings and/or declining sales revenues.
3. Enhanced Opportunities: SCM may sell a stock and replace it with one that has a greater potential for price appreciation at a specific point in time.
Fixed Income Management
SCM's objective with fixed income securities is to achieve a favorable total return (stable income + price appreciation) that will:
• Preserve principal
• Generate current income
• Dampen the volatility in the portfolio
• Provide liquidity in case of financial need
We prefer investment-grade bonds with short-term and intermediate-term maturities with attractive risk-adjusted rates of return. We also select preferred stocks with specific call dates when they are selling at a price below their call price and paying an attractive dividend. Many qualify for the 15% tax rate on dividend income. More aggressive clients with greater risk tolerances may choose to include high-yield bonds and/or preferred stocks that SCM carefully monitors for credit quality issues.
ONGOING REVIEW
Periodic review - The investment process at Security capital is dynamic. Once we develop your initial investment profile and asset allocation strategy, we would like to meet with you on a regular basis to discuss any changes in your needs and goals. At that time we will review how well your portfolio performance is achieving your investment objectives.
|
