Domestic Equity Portfolio
The main goal of this portfolio is capital appreciation. We seek to maximize returns overtime while avoiding excess risk. Within the Domestic Equity Portfolio, we utilize our Sector Selection strategy to allocate the portfolio across economic sectors based on macro economic factors and our proprietary mean reversion model that compares each sector’s current weighting in the economy to where it has been historically. Once our sector weightings have been determined, we utilize a “bottom up” analysis of specific stocks to determine exactly what investments to make in each sector.
Over 10,000 companies are publicly traded, but not all of them meet our investment criteria. We have a screening process which eliminates companies that are too small, too illiquid, in bankruptcy or fail one of several other criteria. Then we use additional screens to identify companies that appear undervalued using one or more valuation metrics. We combine the output of these screens, extensive reading and industry networking to identify the companies that we think warrant being analyzed in detail for possible inclusion in clients’ portfolios.
At this point we research the company extensively, looking at both quantitative and qualitative properties to determine what we believe the company is worth. From there we pick the companies that we feel present the best value and potential for appreciation with minimal downside risk. Valuation is ordinarily based on discounted future cash flows we expect the company to achieve. If we can’t find a specific company in a sector that passes muster, we will round out that sector using a sector ETF. The stocks we buy, and the sectors themselves, are monitored on a consistent basis.
Fixed Income Portfolio
This portfolio seeks to provide clients with steady interest income while protecting principal against loss. While income is important, so is protection of principal which is why we pay particular attention to interest rate risk. Longer term bonds provide more income but are also more sensitive to changes in interest rates, losing value when rates rise and increasing in value when rates fall. That is why it is important to adjust the duration of a fixed income portfolio based on the expected interest rate environment in the future.
Currently we are experiencing record low interest rates and they have only one direction to go in the future. For that reason we are keeping clients’ Fixed Income Portfolios invested primarily in short term bonds. This will provide us with the opportunity to redeploy this money into longer bonds after interest rates have risen to a more normalized level. We may invest in individual bonds or in bond funds. In addition we have shifted a significant amount of what we would normally allocate to clients’ fixed income portfolios to our total return portfolio.
Total Return Portfolio
This portfolio seeks to maximize income with capital appreciation as a secondary consideration. This portfolio invests in high yield investments across several different asset classes including high yield stocks, high yield bonds, preferred stock, Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). For the purposes of this portfolio, we treat these various types of assets as sectors of the portfolio and adjust the weightings of each based on macroeconomic factors, interest rates, yields and relative value between the sectors.
Within each sector, we choose specific investments in such a way to provide diversity, high yield and safety. For example, within the high yield stock sector we choose stocks of companies in less economically sensitive industries with high steady cash flow and low risk of reduced dividends. Within the MLP sector we choose a portfolio of quality companies that provide geographic diversity, a mix of oil, gas and liquids, transportation, storage and transfer.
Each investment in the portfolio is continually monitored and the sectors are periodically adjusted based on changing market, economic and valuation conditions.
Concentrated Position Portfolio
Sometimes a client has a single stock that encompasses a large percentage of their overall net worth. Often it is the stock of the company that the client worked for, acquired through employee options and stock grants. Often it is stock obtained when the client sold their own company to a public company. In these situations often the stock has an extremely low cost basis and the client does not want to realize a huge tax liability from selling the stock to diversify their portfolio.
At Terminus, we are capable of managing the risk inherent in a concentrated position. Often this risk is not readily apparent to the client because they are emotionally attached to their former company and don’t think anything could go terribly wrong. Unfortunately, sometimes things do go wrong. Think of Enron, General Motors, Bear Stearns, Wachovia and dozens more.
Using our strategies, we can continue to defer tax liability while protecting the value of a client’s position against significant declines. Depending on the stock, size of the position, age of the client and other factors, we can accomplish this through a series of option collars, a structured product, a gradual sell schedule or a combination of the above.