Our Investment Process – A Behind the Scenes Look

As a Parsec client, you receive quarterly statements from us which list your individual holdings – stocks, bonds, mutual funds, exchange traded funds, and other securities, combined in a way that is appropriate for your individual situation. But how did we select those particular securities, and what is our ongoing review process? You may be surprised to find out that Parsec has a dedicated team of people who are involved in the day-to-day process of identifying, reviewing, and selecting the securities that you see on your statements. In this article, we will focus on individual stocks, as they constitute the majority of our clients’ assets.

Our process is heavily rooted in fundamental analysis, which means that we look at an individual company’s earnings, cash flow, debt, and profitability measures, compared to similar companies operating in the same industry. These data come directly from the company’s financial statements, and are combined to form various ratios such as price to earnings (P/E), price to free cash flow (P/FCF), debt to equity (D/E), and return on equity (net income/equity). We also use consensus estimates (for measures such as 5-year earnings growth rate forecasts), third party research (Value Line, Standard and Poor’s, Argus, Credit Suisse), recent news, and regulatory filings to flesh out the quantitative data.

In general, we look for financially strong companies that are market leaders, with high-quality balance sheets, stable earnings growth, above-average profitability, and sound management. We compare each company to others in the same industry, as well as to an industry average, so that the fundamentals can be evaluated in the context of that particular type of business.

Based on our research and analysis, we have compiled a list of securities from which an advisor builds your portfolio. We monitor the prices of the securities on this list throughout the day, as well as any news regarding these holdings. In addition, every security in our coverage universe is formally reviewed at least 3 to 4 times a year, and more often if circumstances dictate. Each week, Mark Lewis and I (collectively known as the Research and Trading department) gather information for a group of companies in a particular sector. We analyze the data and submit it to the other members of the Investment Policy Committee (IPC) for review.

Parsec’s IPC consists of eleven members, nine advisors and two research and trading associates (the latter are non-voting). Committee terms are for one year at a time, but advisors may remain on the committee for longer if they wish (the two research and trading associates are permanent members, as are the CEO and one of the managing partners). Every Tuesday morning, the committee meets to discuss each company and vote on a recommendation: buy, sell, or neutral. If the committee votes to sell a stock, the Research and Trading department initiates a block trade across all discretionary client accounts so that the committee’s convictions are effected on a firm-wide basis in an orderly and timely fashion. When the trade is executed, all accounts participating in the trade receive the same price.

Over the past year, as the credit crisis has unfolded, the economy has worsened, and markets have exhibited abnormal volatility, you may have noticed more trading activity in your portfolio as we seek to implement our convictions in response to rapidly-changing conditions. However, of the approximately 80 buy-rated securities that we cover, there are many companies that have been rated a ‘buy’ for a long time and are considered core holdings. You are undoubtedly quite familiar with their names, as you see them on your statements quarter after quarter, and you may have wondered what we do in the way of ongoing research and due diligence. Hopefully, this glimpse into our investment process assures you that we are reviewing those companies as well as the ones garnering more media attention, and will continue to do so, day in and day out.

Sarah DerGarabedian

Research and Trading Associate

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