I've had the great opportunity to hear two portfolio management leaders in the field discuss the process they use to make investment decisions.
At a high level, most people know that investment funds, whether they be mutual funds, or segregated funds, are managed by a team of individuals who make decisions on which stocks and bonds to buy and sell within their fund. Their job is to use their training and expertise to earn a competitive return on the investment fund they manage. This return is passed on to the individuals who have invested in the fund. In essence, when you buy an investment fund, you put your faith in the decisions of the lead portfolio manager and their team. But, do you really know what goes into their decisions to buy, sell and hold various securities?
A few weeks ago I had the rare opportunity to learn from two leading portfolio managers who had flown in from Boston. I was one of 18 financial advisors around the boardroom table in London that day to listen and learn from Dan Janis III, and Walter McCormick CFA., MBA, both with an incredible amount of experience as Senior Managing Directors and Senior Portfolio Managers with several leading companies over their careers like Manulife Asset Management, Wells Capital Management, Keystone Investments, Bank Boston and Morgan Stanley.
Dan Janis, spoke on how he carefully hand picks successful senior analysts for his staff. Because Dan and his team deal with global markets, they need an effective internal network of resources, and a high end external network of global resources in multiple countries to get all the information they need to make decisions in live time. For he and his staff, their week starts at 12:00pm on Sunday and ends at 6pm on Friday. They need to be on their toes while all global markets are open and in play.
Walter McCormick has been successfully managing equity portfolios for 41 years, walked us through a thorough seven step process that he and his team use when deciding which securities to buy, sell, or hold for the funds they manage.
- Conduct an analysis to validate the competitive advantage of the company by comparing their position and those of their competitors using a 5 – 10 year projection.
- Measure the company growth drivers and project their sustainability looking outward for 10 + years.
- Review the company competitive dynamics to determine if the business product or service itself is a good one to invest in. Look for businesses that perform in all business cycles (non-cyclical) and ensure they are not a business competing primarily on price.
- Conduct a traditional financial analysis reviewing the multiple traditional financial ratios used to measure the value of a company to ensure they meet specific criteria.
- Analyse the ROIC (Return on Investment Capital) specific to the company’s management. This is an annual review of all companies to ensure metrics the management is rated on, are consistent with metrics needed for fund growth.
- Complete 4 variations of cash flow analysis to determine the true intrinsic value of the company. Essentially, this measure will help determine if the current price is good. Analyse the best and worst case scenarios looking ultimately for a 2:1 upside/downside ratio.
- Each of these reviews must be completed ongoing, repeated through the whole business cycle and measured relative to their intrinsic value. The seven step process is designed to essentially force to buy low and sell high.
It was a pleasure to hear Dan and Walter share their expertise and processes in such an intimate group setting. Although each fund manager is different, this kind of summary is helpful to understand the general criteria by which securities are selected for investment funds. Their expertise in world markets, securities and corporate financial analysis is astounding. Needless to say, I left the room feeling like my money was in good hands.
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our. Farrow Financial Services Team.