We expect our portfolio management process to result in lower volatility, higher tax sensitivity, lower direct and indirect trading costs, and higher conviction.
Our portfolio management process starts with client objectives and preferences. We manage portfolios on a discretionary basis and manage portfolios according to our core investment philosophy. However, clients may wish to tailor portfolios to reflect our core investment philosophy in combination with their own specific preferences. Portfolios typically remain near fully invested through investment cycles and are focused, holding 40 or fewer securities. Our sector weightings differ from the broad market with heavier portfolio weights in growth sectors like healthcare and technology. We tend to de-emphasize volatile, capital intensive, commodity related, non-growth, and/or cyclical sectors such as consumer cyclicals, energy, utilities, and materials. While we do not ignore sector diversification, we are more focused on bottom up stock selection of attractive growth issues at reasonable prices.
Our stock selection process results in the selection of generally larger capitalization issues with a continuity of earnings growth, ascending dividends, strong balance sheets with relatively reasonable or no debt. In addition, we favor attractive margins, positive or stable margin trend, and strong return on equity. Further, we look for enduring business strategies managed by teams that have demonstrated solid capital stewardship and corporate governance. We target growth issues that are reasonably priced versus their own history, versus the market, or relative to their anticipated growth trajectory. If we expect to hold a meaningful cash reserve (up to around 15%) we invest a portion of cash in higher-quality short-term fixed income funds.
Our buying and selling disciplines are asymmetric processes. We buy fundamentally attractive issues at attractive valuations. We sell issues that we feel have lost their fundamental attractiveness with a limited consideration of valuation. A loss of fundamental attractiveness can be described as an underlying business that no longer holds long-term growth appeal or economic moat. If a fundamentally attractive issue becomes overvalued, it does not prompt us to sell the issue, however, the issue could be sold if additional cash is needed in the account for the client or to make room for a more attractive opportunity. So, valuation plays an important role in the buying decision but a more limited role in the selling decision. We have target position sizes for portfolios but may double the target position size for higher conviction issues or halve the position size for some issues. We do not rebalance positions to the target size once purchased unless, possibly, there is a specific need for cash in the portfolio. Where low risk tax harvest loss opportunities exist, we harvest losses at least once a year in portfolios.
At times we may tactically take advantage of what we view as unwarranted or excessive mispricing by buying our quality issues on the dip.
We expect our process, when combined with a long-term time horizon, to result in lower volatility, higher tax sensitivity, lower direct and indirect trading costs, and higher conviction.