Overview

Ron-Helen 3617-424

Balanced portfolios are composed of stocks and bonds, combining our high quality growth approach to equities with the higher and more stable income of bonds. The appropriate asset mix is determined through consultation with the client concerning the client’s risk tolerance, income needs, and growth objective. We further refine the asset allocation between stocks and bonds around the target mix based on our conclusions about market valuation levels, the economy and investor sentiment and liquidity. Asset allocation reflects our judgment of the relative attractiveness of common stocks to other assets. It is based on a broad overview of economic, political and financial market trends. The equity management of balanced accounts follows our investment discipline for equity-only accounts, focusing on growth companies with strong fundamentals at compelling valuation levels. The fixed income portion of balanced accounts is fully invested at all times with risk managed by changing the maturities and sector emphasis of the portfolio over time.

Philosophy

Montag & Caldwell’s Balanced philosophy combines the disciplines of the Firm’s large cap equity and fixed income strategies. Asset Allocation is client-directed.  The Investment Policy Group generally targets a 60% equity-40% fixed income allocation.

The equity portion of the portfolio is the driving force behind performance, while the fixed income portion is the anchor to windward that mitigates portfolio risk. Emphasis is placed upon positioning along the yield curve and sector weightings. In separately managed accounts, investment policy restrictions are easily accommodated.

Minimal shifts around the client’s strategic target asset allocation are made based upon the Investment Policy Group’s outlook for the equity and fixed income markets. Among the factors considered are the economic environment, financial market valuation, economic and investor liquidity, and investor sentiment. Both short and long-term outlooks are evaluated.

Process

Equity Component

We are long-term investors focusing on high quality growth opportunities. Ours is primarily a bottom-up process in which we interrelate 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 Component

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 Bloomberg Barclays Capital U.S. Government/Credit Bond Index or the Bloomberg Barclays Capital Intermediate U.S. Government/Credit Bond Index, and client guideline into consideration.

The Investment Policy Group, consisting of all portfolio managers 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.

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Equity Sector Weights

Fixed Income Sector Weights

September 30, 2017

Portfolio sector weights are of the Montag & Caldwell Balanced Representative Account.  Please see the disclosures presentation at the bottom of the page for important information that is pertinent to this chart.  Source: FactSet

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Separate Accounts

The Montag & Caldwell Balanced separately managed accounts were established in 1948. The current investment methodology was implemented in 1977. Asset allocation is client-directed and M&C serves as the sub-advisor for the AMG Managers Montag & Caldwell Balanced Fund, which targets 60/40 percent of our Large Cap Growth and Fixed Income strategies.

Mutual Fund

The AMG Managers Montag & Caldwell Balanced Mutual Fund was launched on November 2, 1994. The Fund offers Montag & Caldwell’s philosophy and investment process to the general public. The AMG Managers Montag & Caldwell Balanced Fund is utilized by investors as a way to access a daily valued product or our management services for accounts that are below our minimum individually managed account size of $10 million. The AMG Managers Montag & Caldwell Balanced Fund offers investors the same high quality balanced growth investment process that has been applied to our individually managed accounts since 1977.

AMG Managers Montag & Caldwell Balanced Fund Link

Performance

Equity

M&C’s high quality growth investment strategy enables its portfolios to participate fully in those market conditions that favor growth-oriented investment styles that are based upon earnings growth, not pure momentum regardless of valuation or earnings levels.  Typically, these are periods of low to moderate economic growth and low or declining interest rates.  In stable economic environments, the long-term consistent growth-rate of the Firm’s type of companies is in favor with most investors, and helps to drive the higher valuations of these companies relative to more cyclically oriented companies.  In low interest rate environments, investors are willing to pay more for high-quality and consistent earnings streams.

One of the hallmarks of M&C’s large cap growth investment process is that it does not often stay out of favor for long periods.  The Firm’s attention to the valuations of the growth companies it buys allows it to find good opportunities even when the growth style of investing may be out of favor.

Our investment process also tends to experience less downside risk relative to peer processes, and it would not be unusual for our product to outperform in a down market.  Our use of a stock-specific, risk-adjusted discount rate, which is a unique component of our valuation work, combined with our use of conservative growth assumptions in our quantitative valuation process have contributed to reducing risk in our portfolios while allowing us to maximize upside potential.  Our stock-specific, risk-adjusted discount rate is determined by our proprietary financial scoring process which rewards high quality companies, and also advantages companies with historically predictable earnings.

The most difficult environment for M&C’s approach is one of speculative excess driven purely by price momentum and disconnected from fundamentals.

Fixed Income

Our objective is to provide an above market return while assuming less credit risk than the market, and without excessive activity.  By analyzing the expected total return of a bond portfolio within a range of possible interest rate movements, we seek to structure portfolios to outperform the market with lower risk over a complete interest rate cycle. This approach maximizes our probability of success.

Quarterly Returns

Composite performance is annualized for periods greater than 1 year.  Returns as of September 30, 2017.  Source: Axys

Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table.  

 3Q17Year to Date1 Year3 Years5 Years7 Years10 Years15 Years20 Years25 Years30 Years
Institutional Balanced Composite Gross of Fees3.2512.289.676.707.998.936.757.516.378.529.09
Institutional Balanced Composite Net of Fees3.1712.029.336.377.668.606.427.115.958.078.62
S&P 500 60% Bloomberg Barclays Capital U.S. Govt/Credit 40%3.019.8510.877.729.379.896.507.976.598.258.64

Monthly Returns

Composite performance is annualized for periods greater than 1 year.  Returns as of November 30, 2017.  Source: Axys

Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table.  

 11/30/2017YTD*1 Year*3 Years**5 Years**7 Years**10 Years**15 Years**20 Years**25 Years**30 Years**
Institutional Balanced Composite Gross of Fees2.2916.4516.816.698.939.126.777.376.58NANA
Institutional Balanced Composite Net of Fees2.2716.1316.466.368.608.786.436.976.16NANA
S&P 500 60% Bloomberg Barclays Capital U.S. Govt/Credit 40%1.7913.4214.877.5210.1810.086.897.606.68------

Calendar Year Returns

Understanding our style through relative performance is important, and is easily shown on a calendar year basis.  As we discussed above, our clients do well in growth-oriented markets driven by earnings, rather than momentum regardless of valuation.  Our clients also tend to do better in down markets, often as a result of a growth at any price environment coming to an end, resulting in volatility as the market re-prices risk commensurate with valuation.

Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table.  Source: Axys

YearInstitutional Balanced Composite Gross of FeesInstitutional Balanced Composite Net of FeesS&P 500 60% BBCGC 40%
2016-0.29-0.618.49
20154.614.281.15
20147.437.1110.62
201317.917.5417.42
201210.6510.3211.56
20115.254.935.04
20108.68.2512.16
200920.9920.5917.74
2008-18.05-18.33-21.91
200716.9816.536.35
20067.316.8210.88
20054.764.223.97
20044.564.018.25
200312.4911.9518.76
2002-10.83-11.25-9.54
2001-4.12-4.58-3.67
2000-0.76-1.23-0.92
199913.6313.111.4
199822.6622.0721.31
199724.223.6123.59
199621.4120.814.65
199530.7930.1330
1994-1.15-1.66-0.57
199310.810.2810.52
19928.928.47.66
199132.6832.0724.81
19904.854.331.56
198920.820.2524.67
198811.210.6712.98
19878.027.55.48
198615.0514.517.86
198524.9424.3627.63
19842.932.439.91

Risk

In the equity allocation, our use of a stock-specific, risk-adjusted discount rate, which is unique, and conservative growth assumptions in our quantitative valuation process have contributed to reducing risk in our portfolios while allowing us to maximize upside potential.

On the fixed income side, we are focused on investment-grade fixed income.  Large, liquid issues are primarily purchased for corporates, agencies and asset-backed securities, with a minimum preferred issue size of $500 million.  Corporate bonds are typically rated “A” or higher, and asset-backed securities are only “AAA” rated and typically have credit enhancement attached to the issue.  Credit risk is avoided on the long end of the yield curve by focusing on corporate bonds with maturities of ten years or less.  Excluding U.S. Treasuries, the weighting in an issuer is limited to 5% of the market value of the portfolio.

Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this chart.  Data as of September 30, 2017.  Source: National Consulting Firm

Rolling Five Year Standard Deviation

Equity Characteristics

As of September 30, 2017

Please see the disclosure presentation at the bottom of this page for important information that is pertinent to the below charts.  Equity characteristics are of the Montag & Caldwell Large Cap Growth Representative Account.  Source: FactSet

Number of Holdings33
Weighted Average Mkt. Cap$174,801MM
Price to Earnings - Trailing25.57
Price to Earnings (NTM)21.37
Estimated 3-5 Year EPS Growth14.16%
Active Share74.70%

Fixed Income Characteristics

As of September 30, 2017

Please see the disclosure presentation at the bottom of this page for important information that is pertinent to the below charts.  Fixed Income characteristics represent the Montag & Caldwell Balanced Representative Account.  Source: Factset

Average YTM2.16%
Average Coupon2.83%
Average Maturity6.57
Average QualityAA
Current Yield2.73
Effective Duration5.3

Top Ten Equity Holdings

As of September 30, 2017

Please see the disclosure presentation at the bottom of this page for important information that is pertinent to the below charts.  Equity holdings are of the Montag & Caldwell Large Cap Growth Representative Account.  References to specific portfolio securities are not intended as recommendations of those securities and carry no implications about past or future performance.  Information about all recommendations made within the past year is available upon request.  Source: Axys

UnitedHealth Group Inc4.7
Facebook Inc4.3
Visa Inc-Class A Shares4.3
Alphabet Inc Cl A4.2
Microsoft Corp4.2
Dollar Tree Inc.3.6
Priceline Group, Inc 3.6
Oracle Corp3.5
Lauder Estee Cos Inc Cl A3.3
Intercontinental Exchange, Inc3.2