Investing in High Quality Companies With a Long Growth History
The Essential Growth Portfolio℠ seeks capital appreciation, with dividend income a secondary consideration, by investing in common stocks of companies that demonstrate long histories of strong returns on equity and consistent earnings growth. These companies, which typically have market capitalizations in excess of $2 billion, are likely to continue to deliver strong financial results in our judgment.
Seeking Consistent Long Term Results
The Essential Growth Portfolio℠ is designed to be a core holding of US mid/large cap stocks in a client’s investment portfolio. We seek to match or exceed US equity market returns over a complete market cycle with significantly less risk. We believe that owning a portfolio of high quality companies – those with strong balance sheets, effective management, solid business plans and access to capital -- will deliver excellent risk-adjusted returns over a complete market cycle, if chosen according to a disciplined, value-oriented process.
Using a Disciplined, Value-oriented Selection Process
We screen the universe of publicly traded US stocks for companies that meet our stringent requirements for long term financial results. Then we cull this initial list for companies that are unlikely to continue their past successes because of macroeconomic headwinds or company-specific adverse developments.
For the companies that survive these screens, we review long term forecasts of revenues and earnings along intrinsic values based on discounted cash flow projections. We combine these values and several other valuation metrics to determine whether each stock is trading at a significant discount to potential future value. If so, we evaluate each stock against other holdings. Are its prospects better? Does it provide exposure to growth we don’t currently have? Is its value more compelling than other holdings?
The net result is a portfolio of stocks that have been carefully selected for their ability to deliver strong results consistently – a portfolio that can be a core part of a client’s investments.
Total Returns for Periods Ended September 30, 2019
Number and Size of Positions
The Essential Growth Portfolio℠ typically consists of 20-35 companies and position sizes vary from 1-6% of portfolio assets. Position sizes are determined based on our judgments regarding:
Confidence in management’s ability to deliver anticipated financial results
Likelihood that the discount to intrinsic value will be reduced in the future
Strength of the company’s business model in the context of the future expected economic climate
Competitive positioning and prospects for profit margin maintenance or expansion
Sector Weightings as of September 30, 2019
Additional Portfolio Information:
Turnover and Sell Discipline
As long as a company continues to deliver results that meet our quantitative screens and remains at a reasonable valuation relative to its growth prospects, the preferred holding period is forever. Portfolio turnover is generally low, averaging less than 30% annually.
A position in the Essential Growth Portfolio℠ may be reduced or eliminated if the outlook for a company changes so that it is unlikely to meet our quantitative requirements or if the stock becomes significantly overvalued, relative to its growth prospects, based on our research.
The Essential Growth Portfolio℠ is a composite of portfolios managed by Essential Investment Partners, LLC (“EIP”) in this strategy. This Portfolio may be used as a model for recommendations to other advisory clients, depending on the clients’ individual needs, financial condition and risk tolerance. As a result, holdings in an individual client’s portfolio may vary significantly from the holdings presented above.
All composite returns are calculated as time-weighted returns, reflecting the reinvestment of dividends and capital gains, the effects of cash holdings and the deduction of brokerage commissions on cash holdings. “Gross” returns are the total return composite for the Essential Growth Portfolio℠ without the effect of management fees charged by EIP. “Net” returns reflect the gross returns adjusted actual fees charged to clients. For non-fee paying clients, Net reflects gross returns adjusted for the effect of charging a hypothetical fee using EIP’s standard fee schedule of 1% of assets per annum up to $2 million, 0.75% of assets per annum on the next $3 million of assets and 0.50% of assets per annum on assets in excess of $5 million. This is the highest fee schedule charged to any direct client of EIP using the Essential Growth Portfolio℠. Actual fees may vary depending on the applicable fee schedule, portfolio size and other factors. The composite contains all fee-paying accounts which are or were managed as standalone portfolios using this strategy. Past performance does not guarantee future results. Investing in stocks involves substantial risks, including the risk of losing some or all of the amounts invested.
Prior to 2007, the Essential Growth Portfolio℠ included stocks of all market capitalizations. Since the beginning of 2007, a stock must have a market capitalization greater than $1 billion to be considered for purchase (and legacy positions were eliminated by the end of 2007). The portfolio management team changed in October, 2015.
The Sharpe ratio measures the amount of return per unit of risk taken and is calculated by dividing the five year annualized gross return by the five year annualized standard deviation. The sources for other portfolio characteristics -- all of which are position-weighted averages -- are Morningstar, Inc. and internal calculations performed by Essential Investment Partners, LLC.
The S&P 500® (a registered trademark of Standard & Poor’s Financial Services LLC) is an unmanaged index of U.S. stocks weighted by market capitalization. The S&P 500® returns presented above are time-weighted total returns, reflecting the reinvestment of dividends.
This information is for illustrative purposes only; nothing contained herein is intended as investment advice or an opinion regarding the appropriateness of any investment, or a solicitation of any type.
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