At a Glance
- Primary Benchmark: 60% Russell 1000® Value Index/40% Bloomberg Barclays Gov't/Credit Index
- Equity Universe: Holdings generally have a market capitalization greater than $1 billion at purchase. Typically, at least 60% have capitalizations greater than $5 billion at purchase
- To be considered for purchase, stocks must be substantially undervalued on a price-to-earnings (P/E), price-to-book (P/B), price-to-cash flow (P/CF), or other valuation basis
- We focus on industry leaders
- Our portfolios are well-diversified and carefully structured with regard to economic sensitivity
We seek to outpace the long-term performance of a blended hypothetical benchmark (60% Russell 1000 Value Index/40% Bloomberg Barclays Gov't/Credit Index) while adhering to our value-oriented investment philosophy.
Asset Class Selection
The typical asset allocation of our Domestic Balanced portfolios is 60% equities and 40% fixed income securities. We vary this mix based on our assessments of macroeconomic and market conditions. Among the economic factors we consider are the state of the business cycle, monetary and fiscal policies, inflation trends, and sentiment indicators. The pace of corporate earnings growth is also important: when earnings growth exceeds its long-term average, equities generally—and value equities especially—tend to perform very well. As earnings peak and level off, value stocks tend to struggle and bonds may offer better value. Our Domestic Balanced portfolios typically allocate 50%-70% of assets to equities and 30%-50% of assets to fixed income securities.
Large Cap Value Equity
We typically hold 60-80 stocks in Domestic Balanced portfolios. To begin the stock selection process, we screen all domestic equity securities to identify those with P/E ratios in the bottom 40% and/or P/B or P/CF ratios in the bottom 25%. To the resulting universe of 500-plus stocks, we apply our relative-value screen. We compare each stock's current valuation—as measured by its P/E, P/B, and P/CF ratios, prior sales growth, insider activity, yield, and return on equity—to historical norms, and then select 150 stocks that appear inexpensive relative to the market, their peers, and their historical trading ranges. Through fundamental analysis, we seek to understand why those stocks are undervalued and to identify those companies most likely to return to normal valuation levels.
Domestic Fixed Income
We apply a top-down process when structuring domestic fixed income portfolios. We attempt to uncover undervalued securities by analyzing macroeconomic conditions, business and liquidity cycles, and the level of real (inflation-adjusted) interest rates. We also look for price-spread anomalies, which might signal opportunities among specific sectors or securities. The U.S. economy's growth trend and its current position in both the business and liquidity cycles are key components in determining our investment strategy and the appropriate duration and maturity structure of our fixed income portfolios. In high real-rate environments, we have found that investors are paid to accept additional interest rate risk. As a result, in periods where real interest rates are high, we are more likely to lengthen portfolio duration relative to the Bloomberg Barclays Gov't/Credit Index.