Overall Design of Portfolios: At Brick Financial, we run several predetermined portfolios with specific investment objectives and each is designed to perform well over at least a three to five-year business cycle. Our Core Portfolio covers the large, medium and small cap sectors of the market. Nearly all clients will be invested in the Core Portfolio. Individual equity positions in each portfolio are typically 3% to 5% of the total portfolio while industry concentrations are generally limited to 20%.
For investors whose primary concern is income and/or capital preservation we include portfolios made up of exchange traded index funds (ETFs). The ETF strategy entails style-rotation and sector-rotation methodologies designed to create prospective outperformance versus the broad market. These portfolios will contain both stock and bond ETFs designed to mitigate trading costs, management cost, taxes and short term volatility.
We do not believe that anyone has to ability to time the market – a system of selling at market tops and buying at market bottoms. Therefore, it makes sense to us to always be fully invested in the stock market. Very little of client portfolios will be held in cash with the exception of the 2%-3% of assets held for fee and expense charges.
Portfolio Characteristics: As a general rule, securities in a portfolio have above-market growth rates, higher than average return on equity and strong levels of cash flow. Additionally, they typically maintain below market price-earnings and debt-to-capital ratios. While the median, market capitalization of the stocks on our core Focus List is approximately 5 billion, we invest in companies of all sizes where liquidity permits.
Concentration: Holding a smaller number of stocks in a portfolio (10-35 stocks, for example, rather than 100-150 like most mutual funds) is important to our investment philosophy. By building focused portfolios, our best ideas can have a meaningful impact on investment performance. Evidence suggests that concentrated portfolios lead to superior long term investment performance. Holding an excessive amount of securities will lead to, at best, average performance. We think it does not take much talent to be average. In the words of Warren Buffett, “One can learn to be average in 5th grade.”
Sell Discipline: We are long term investors, however, under some circumstances it is prudent to withdraw our funds. Circumstances requiring such action include:
The company has reached full valuation or has reached a level where future returns would be sub-par
The current price multiples are well above long-term historical average multiples
The economics of the company are deteriorating
Management proves to be inept, irresponsible or unresponsive
We have found a superior investment alternative
When we have made a mistake in calculation or judgment.
Benchmarks: We do not structure portfolios to a specific index. However, we do think it is important to compare our long term results to appropriate indices. Thus, we seek to provide investment returns net of costs superior to returns that might be achieved in an index fund of similar characteristics as our portfolios.
Portofolios: Equity >>
Portofolios: Balanced >>
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