Portfolio Guidelines

Return management

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.

Risk Management

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. 

Cost management

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:

  •  Transactions costs: 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. 

  • Capital gains 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 - 3 % more than the market in order to match the post tax return of an index portfolio.

IMI's investment 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.




Copyright © 2005 Investment Management Institute, LLC