Our equity management process begins with a top down effort to understand the current business cycle and to identify long-term secular trends impacting the current business cycle. We then develop macroeconomic and market specific frameworks in which to construct our portfolios. As “whole market” investors, we assess a variety of indicators such as trends in the business cycle and changes in the shape of the yield curve and the direction of interest rates to determine whether market risk premiums are rising or falling. We determine the phases of the business cycle by our yield curve analysis and assessment of Federal Reserve policy. Our research has shown a pattern in the performance of various sectors and industries in every phase of the business cycle. We use these conclusions as strategic guides when positioning our portfolios.
Our Equity Duration model utilizes cash flow return on invested capital and quantifies the impact of changes in the market discount rate on the present value of short duration versus long duration stocks. This analysis is conducted by measuring changes in the present value of future growth prospects caused by changes in the market discount rate. Companies that derive a larger proportion of their current valuation from future growth prospects are more sensitive to discount rate fluctuations and have longer duration. Companies with lower growth rates are less sensitive and have shorter duration. Equity Duration enables us to position our portfolios to take advantage of changes in the relative valuation of short duration (value) stocks and long duration (growth) stocks and overweight attractive sectors.