Terminus Invesment's Three Steps
At TERMINUS, we seek to provide our investors with superior risk adjusted returns while protecting principle against permanent losses. We take into account macroeconomic and market conditions as well as a bottom-up analysis of each individual potential investment. We accomplish this in three steps, Asset Allocation, Sector Allocation and Security Selection, striving to add value at each step.
Asset Allocations are specific to individual clients’ needs. We take into account each client’s specific circumstances including time horizon, risk tolerance, ongoing contributions, income requirements, goals and many other factors. From this we develop an Asset Allocation that fits the client’s profile. We will allocate a client’s assets amongst the most appropriate combination of stocks, bonds, mutual funds, exchange traded funds (ETFs), Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), and hybrid securities such as preferred stock. Then based on economic and market conditions we may at times deviate from that allocation by no more than 10% to seek to add additional value to the portfolio. We will revisit a client’s target allocation with them periodically and make any larger changes that may be necessary due to their changing goals and needs.
For Sector Allocation, we start with the market allocation, then we overweight some sectors and underweight others based on economic and market factors as well as a quantitative analysis that looks at sector weightings relative to where they have been over the long term, knowing that after large sudden swings (such as technology in the late 90s) there is almost always a correction. In the fixed income arena we analyze such factors as interest rates and spreads to determine our target durations, credit qualities and types of securities.
Once we have determined our target Asset Class and Sector Allocations, we seek to find specific securities in each sector and asset class that present the most attractive value. We do that primarily through a bottom-up analysis of the issuer in question. We emphasize not just earnings, but cash flow, the health of the balance sheet, competitive position, quality of management and many other factors. It is our goal to find stocks and other securities that the market prices below their intrinsic value. By buying stocks in companies that have strong earnings and cash flow potential, a healthy balance sheet, an advantage over competitors and competent management, we believe we can protect investors against permanent losses while providing significant upside when the market realizes the company’s true intrinsic value.
However, even on the specific security level, we take larger market factors into consideration. The best company in a dying industry may appear undervalued, but it is unlikely that will ever change and sooner or later they will circum to the industry’s deteriorating fundamentals. Likewise, we may accept a smaller discount to intrinsic value in an industry that is expanding in a secular trend likely to continue for a long period of time.
We would like to end with a note about our approach to cash. At TERMINUS, we believe that our clients are paying us to invest their money and earn a return. For that reason, we do not leave a significant amount of client money sitting in cash. Furthermore, we do not bill on any money that is in cash. In this way we take an approach that is contrary to many value oriented managers. There is an opposing theory that an investor should leave a significant amount of one’s portfolio in cash as “dry powder” in order to take advantage of sudden market downswings that leave some stocks significantly undervalued. The cash would then be plowed into those stocks. The problem with this strategy is that while it sounds great on paper, it rarely ever works that way in the real world. Often times these investors will find they have the least amount of cash near market tops when stocks often appear to be a relative bargain based off peak earnings and cash flows just before an economic downturn; then they will have their highest cash allocations at market bottoms when stocks don’t always appear cheap because of depressed earnings. This is the opposite of what should happen if the dry powder strategy is working. For this reason and to prevent a “cash drag” on performance, we choose not to try to time the market.