Since our objective
with all our investment strategies is to keep turnover to
a minimum the governing principle behind our research is long
term stock price prediction. Many factors influence
short-term price behavior of stocks, but long-term price behavior
is governed by the earnings trajectory of companies.
To that end, IMIÚs investment strategies seek stability
and persistence in earnings growth.
It is our historical
experience that companies with consistent earnings trends
also happen to deliver good stock market results over extended
periods of time. However, persistence and stability
are not sufficient to create a comprehensive investment discipline.
In addition, our models take into consideration: earnings
forecasts, company valuation, earnings quality and technical
factors. Only companies that are able to score highly
across each of these attributes are considered for inclusion
in the portfolio.
Regardless of how
logical and effective an investment strategy happens to be,
it tends to expose the investor to certain risk parameters.
However, at IMI we do not believe in using blanket risk control
systems. Rather, we customize the risk management to
the risk exposures of the investment strategy. We also
build risk management into our portfolios through the use
of deliberate holdings diversification.
In addition to management
fees charged by investment companies, the other significant
source of portfolio costs is turnover. Turnover, that is buying
and selling securities from the portfolio, triggers two significant
sources of performance drag:
Brokerage commissions capture but a very small percentage
of transaction costs. The full impact of transaction costs
include: commissions, bid-ask spreads, market impact and
other opportunity costs such as timing costs, lost trades,
etc. In sum, it costs around 1% of principal to trade
a large cap, highly liquid position. The costs are 4-5
times as large for small cap or illiquid positions. Since
these costs are incurred with every trade, the only way
to control them is by reducing the frequency of trading.
taxes: For a taxable portfolio, with every trade one stands
to lose either 20% or 40% of the capital gains realized.
The impact is that a manager operating with typical institutional
turnover parameters has to earn 2 ½ - 3 ½% more than the
market in order to match the post tax return of an index
strategies are developed with the expectation to earn excess
return, not only from market inefficiencies, but also from
savings realized due to extremely low turnover portfolios.
As far as we are concerned, there is no difference between
earning a dollar and saving a dollar. And being able to do
both simultaneously is the key to building wealth.