In constructing and managing personalized investment portfolios for our clients, we take an active approach to selecting primarily individual equity and income securities. Our portfolios are diversified across sectors and market capitalizations and designed to meet a client’s specific investment needs and objectives.
The first step in developing a client’s investment portfolio is to choose the appropriate asset allocation, or the percentage of funds that are held in equities and the percentage held in income generating investments. Asset allocation is a fundamental decision in investing and affects both the total return that a portfolio is likely to achieve and the volatility of the portfolio. We work closely with each client to develop and implement a personalized asset allocation strategy based upon the client’s specific situation and investment goals. After establishing a portfolio, we regularly rebalance the holdings to maintain the appropriate allocation.
We evaluate investments based on fundamental measures of financial health, management strength, and competitive advantage to develop an estimate of a security’s intrinsic value. We look for opportunities to buy a security at a significant discount to its intrinsic value, thus providing a margin of safety for our investment. Once we buy, we tend to hold an investment for an average of four to five years, much longer than most investors hold securities they purchase. In addition to allowing time for investments to reach their full value, this long-term approach also aims to minimize taxes and transaction costs.
We typically invest the equity portion of each client’s portfolio in a diversified group of 30-35 U.S. and international stocks. We seek to identify companies exhibiting some or all of the following criteria:
- Low-price-to-earnings ratio (P/E)
- Low price-to-book value or tangible asset value
- Strong prospects for growth
- Strong franchise/wide moat (competitive advantage)
- Qualified, shareholder-oriented management
- Consistent free cash flow
- High returns on equity and invested capital
We take a broad view of income investing and, unlike many investment managers, do not limit our income universe to government and corporate bonds. We do buy bonds when we find them attractive. But we also look for opportunities among asset classes such as utilities, real estate investment trusts (REITs), and other high dividend stocks; preferred stocks; master limited partnerships (MLPs); convertible securities; and high yield bonds.
The selection of income generating investments varies depending upon the specific circumstances of each client, including his or her risk tolerance, age, investment time horizon, and need for income. We seek securities that offer relatively high current yields and also offer the potential for long-term capital appreciation based on our analysis of intrinsic value.
The opinions expressed herein are those of Edgemoor Investment Advisors, Inc. (Edgemoor) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to sell any product. You should not assume that any of the investment strategies or securities discussed here are or will be profitable. Edgemoor reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.