We are calling this market “Mr. Toad’s Wild Ride” so it might be of interest to explain about our investment process and how we determine what to buy and what to sell, particularly during times like these. We have a buy list with securities, mutual funds, index funds and ETFs. Each security is “vetted” by our Investment Policy Committee, which reviews the securities’ fundamentals before being placed on our buy list.
We have two dedicated research and trading associates who compile the research material necessary for our analysis. Some of the standard fundamental measures of the companies we review are: debt-to-equity ratios, P/E ratios (price-to-earnings), PEG (price-to-earnings relative to growth), cash flow measures, operating expenses and profit margins, and dividend yields. The information is compiled for the committee to review, focusing on a different sector each week. Our goal is to pick the strongest companies within each market sector and add these to our buy list. Sometimes a security’s metrics change our opinion about that security, and we downgrade it to a neutral or a sell. According to firm policy, advisors are prohibited from buying anything that is not on our buy list, though we can buy securities if the client directs us to do so. All exceptions must be documented.
On a broader scale, we have portfolio guidelines that give us the allowable range of assets in any particular sector. For instance, a growth-oriented portfolio is allowed to have between 4 – 8% of equity holdings in the software sector, and between 12 – 25% of equity holdings in international companies. Individual securities cannot be over a 5% weighting of the total portfolio. Our Financial Planning Committee spot checks a sample of each advisor’s portfolios for compliance purposes on a monthly basis. Some clients do have favorite securities over the 5% weighting that they don’t want to sell for a number of reasons, such as tax sensitivity. All out-of-compliance items must be documented in the client file. In this way, we ensure that each client’s assets are managed in accordance with Parsec philosophy and guidelines.
Many clients ask how often we look at their portfolio. In fact, our buy securities are on a spreadsheet that we all look at on and off all day long. Any unusual price changes dictate a full fundamental metric review, while other securities get a full analysis on a regular basis in our Investment Policy Committee. Individual client portfolios are reviewed on a weekly or monthly basis, depending on the specific client’s situation.
Lately the view has been grim, and as with the market as a whole, many of the securities we buy for our clients have been beaten down far beyond where company-specific fundamental analysis suggests they should be. The opposite occurred with the technology boom in the late 90s when fundamentals did not support the high prices of many stocks. This time securities are undervalued, which we view as a good time to invest. Focusing on good quality companies, with good fundamentals, will serve you well over the long term.
Barbara Gray, CFP®
Chief Compliance Officer