Investment Strategies - Balanced
Process
Equity
We are long-term investors focusing on high quality growth opportunities. Ours is primarily a bottom-up process in which we inter-relate valuation with earnings momentum. We offer a concentrated portfolio of 30-40 issues actively managed by a team comprised of both portfolio managers and analysts. The team is the catalyst in our decision-making. While we recognize the need to diversify a portfolio's securities and sectors in order to reduce its risk, we believe that, in order to add value, it is also important to have some sector concentration in the portfolio. We are willing to totally exclude a sector from our portfolios if we do not see sufficiently accelerating earnings and/or appropriate valuations.
Our large cap growth equity philosophy utilizes a valuation technique which focuses on a company's future earnings and dividend growth rates. The process utilizes a present valuation model in which the current price of the stock is related to the risk adjusted present value of the company's estimated future earnings stream. Our analysts closely follow approximately 150 names culled from a universe of approximately 10,000 common equity securities through: market cap screens (>$3 billion); earnings growth rates (minimum 10% historical); proprietary quality evaluation, earnings and valuation models; and fundamental analysis based on qualitative factors and strong financial characteristics. We seek to buy growth stocks selling at a discount to fair value and at a time when superior earnings per share growth is visible for the intermediate term. Our employment of a risk-adjusted discount rate is a unique component of our valuation work. This rate is determined by our proprietary financial scoring process which rewards high quality companies. A holding will be reviewed for sale when it reaches our target price, which is normally 120% of the estimated fair value. A significant earnings disappointment will trigger an immediate review of the holding and a decision will be made to buy additional shares or reduce or eliminate the position.
Fixed Income
Montag & Caldwell utilizes a total return approach to fixed income portfolio management. Both sector weightings and weighted average duration targets are actively managed according to our outlook. Our objective is to provide an above market return while assuming less credit risk than the market.
Montag & Caldwell employs an active, yet conservative, approach to the management of fixed income portfolios. Portfolios are constructed taking the benchmark index, which is typically the Lehman Brothers Government Credit Index or the Lehman Brothers Aggregate Index, and client guidelines into consideration.
The Investment Policy Group, consisting of all portfolio mangers and analysts, determines the outlook for the economy and interest rates through an analysis of the business cycle. Fed policy, GDP growth, inflation rate expectations, the unemployment rate, exchange rates, industrial production and capacity utilization are factors influencing the duration decision. The weighted average duration is targeted to be long or short versus the benchmark index in accordance with the economic outlook of the Investment Policy Group. Our duration decisions are implemented within a limit of +/- 20% of the benchmark index. The average duration of our clients’ portfolios is adjusted as our outlook changes, which may be monthly or as infrequently as quarterly. Large percentage moves are avoided, with a typical change of 3%.
Analysis of the yield curve is conducted to implement the duration decision. Various points along the yield curve may be under or overweighted versus the index based upon a relative rich/cheap analysis. The historical shape of the yield curve in the context of the current stage of the business cycle plays a role in this analysis. Montag & Caldwell does not utilize strict barbell/bullet strategies, as a percentage of our portfolios will always be maintained in the middle of the yield curve. However, if a flattening of the yield curve is anticipated, with long rates falling, a barbell strategy will be utilized, to the extent that we will underweight the middle of the curve. Conversely, if a steepening of the yield curve is anticipated, a bullet strategy will be employed.
