Interinvest Global Balanced
For both individual and institutional investors, the first step in achieving above- average risk-adjusted returns is to focus on preservation of capital during periods of higher than normal risk in the markets. Interinvest’s basic investment model utilizes a “top-down” approach. Through an analysis of current geopolitical events and their effects on macroeconomic trends, we anticipate secular trends and how they affect the world’s financial markets.
It is our experience that a solid foundation is critical to achieving good invest- ment results. Investment returns are driven by both macro and micro factors. We believe that investment portfolios should be built by first keeping an eye out for the big picture.
Interinvest’s professional investment staff monitors the political climate, the economic environment, central bank monetary policy, the inflation outlook, mar- ket performance and expectations and corporate profit growth, among the main “big picture” factors. By assessing whether the overall environment is friendly or hostile to investors, and whether it is deteriorating or improving, we make the major asset allocation decisions that allow us to proceed to the next level in the investment process.
In spite of practitioners’ efforts to portray investing as a science, it is our belief that there is a considerable amount of “art” involved in steering a successful course through the myriad investment risks and opportunities beckoning to today’s in- vestors. There is no substitute for experience and perspective. The group of indi- viduals responsible for determining Interinvest’s investment policy at any given time are the members of the Investment Policy Committee. Collectively, the five current individual members of this committee have over 135 years of professional experience in managing investment portfolios. In terms of stability, all members of this committee have been with the firm in excess of ten years.
The Investment Policy Committee has a quarterly Asset Review meeting. A for- mal macroeconomic outlook is developed and examined through the medium of an in-depth quarterly report by Interinvest’s economic staff. This becomes the key to developing the investment strategy for the coming quarter. Target weightings for all markets, relative to their respective allowable ranges, are set at this meeting.
In order to react to changing conditions, the Investment Policy Committee has monthly meetings. Economic updates and input from strategists and portfolio managers are factored into the decision matrix and asset allocation targets are adjusted as appropriate.
Individual stock selection is formalized at weekly Investment Policy Committee meetings. At these forums, individual analysts, portfolio managers and Committee members present ideas for individual se- curities that have survived to this point in the screening process. The Committee determines which of the security ideas presented is ap- propriate for inclusion in clients’ portfolios. Decisions are made not just whether a security can be purchased, but also acceptable ranges for buying and a target price representing full valuation.
All investment professionals at Interinvest are involved in a daily morning call linking our offices. This forum includes a review of market activity and significant news, as well as discussion about fac- tors affecting present or prospective security holdings.
While the top-down analysis described above drives the invest- ment process, it is the selection of individual securities that is ul- timately responsible for the returns our clients enjoy. When it comes to selecting the components of our portfolios, the selec- tion process is driven by a bottom-up approach.
Our research process is collaborative. All portfolio managers are also analysts engaged in developing investment ideas. Our ana- lysts and portfolio managers are constantly on the lookout for interesting security ideas. These ideas may be the result of propri- etary electronic screens, or may be a follow-up to ideas found in trade and business publications or developed through contacts with companies or analysts. Ideas that pass this initial stage are then investigated further to insure that they fit Interinvest’s macro outlook, that the underlying assumptions as to growth and value are supportable and that an attractive risk vs. reward relationship is present. This winnows the list down further.
Finally, the most attractive issues are carefully examined and presented to the Investment Policy committee. These presentations are all subjected to a high level of scrutiny to assure that Interinvest has faith in the accuracy of the company’s reporting, the vision of management in charting a profitable course, the ability of the company to execute its business plan, and a demonstrated commitment to shareholder interests above all else.
When a company satisfies these requirements, has fundamentals which are sup- ported by our top-down analysis, and has been determined to be in an acceptable buy range using a combination of fundamental and technical factors, the Invest- ment Policy Committee will add it to the firm’s “Buy List” and it can be imple- mented in the firm’s portfolios. The analyst or portfolio manager responsible for generating the idea assumes continuing responsibility for monitoring the posi- tion and making follow-up recommendations.
The majority of equity holdings purchased in Interinvest portfolios possess some or all of
the following traits:
- Cash & Equivalents on balance sheet equal to or greater than 15% of current stock price
- Total Debt to Common Equity less than 40%
- P/E ratio of less than 15
- P/E ratio at lower end of historic range
- Price to Free Cash Flow ratio of 15 or less
- Price to Sales ratio of 3 or less
In addition to these traits, Interinvest looks for companies with
- Undervalued assets
- New or as yet unrecognized product cycle
- Viable turnaround prospects
- Promising catalyst(s) for growth
- Identifiable competitive advantage
- Market leadership or dominance in a cyclical or currently out-of-favor industry
Interinvest controls risk both from a top-down asset allocation standpoint and from a bottom-up security holding perspective.
On a top-down basis, most of our clients allow us to make the decision to raise cash levels in order to adopt a more defensive posture when confronted with an environment of excessively high valuations, restrictive central bank policies, ris- ing inflationary pressures or any other factors which skew investment risks asym- metrically downwards. In portfolios with a fully invested mandate, Interinvest will adjust to higher perceived risk by lowering portfolio ßeta and rotating into countries, sectors or industries which are better suited to weather the coming storms.
On an individual security basis, it is important to know your companies and why you own them. All positions are monitored daily by both analysts checking the fundamentals and traders checking the market dynamics.
Risk is further controlled by diversification. No single position comprises more than 5% of any portfolio at cost, with the majority of positions representing 1-2% of portfolio holdings in individual accounts and less than that in institutional accounts.
Our normal expected holding period for a security is 1 - 3 years. However, stocks are sold sooner when they achieve predetermined targets, when funda- mentals unexpectedly deteriorate or when relative price strength produces a “nega- tive” signal. Stocks may also be sold based upon early warning signs such as dete- riorating earnings for the weakest companies in an industry signaling possible problems ahead for even the strongest members of the group. Stocks are also pared back, or sold completely, if their appreciation has given them outsized weighting in the portfolio. In making these determinations, Interinvest considers the tax implications to the client, where appropriate.