Our holistic approach to our client engagements is not complete without the implementation of a customized investment plan. For our core equity approach, Nelson Roberts Investment Advisors utilizes a growth at a reasonable price (GARP) equity investment style to evaluate and select individual securities for our client portfolios. Our fixed income security selections are generated from an intermediate active duration analysis of the current yield curve environment. The allocation between those broad asset classes in every client portfolio is custom fit to reflect their unique risk and return criteria.

Equity Management

Our growth at a reasonable price valuation methodology begins with an analysis of both the global and domestic economies in an effort to identify macro trends. From this work, we set our strategy for asset allocation between both domestic and international asset classes as well as amongst large capitalization and small capitalization equities.

Within each asset class we utilize this top-down economic framework to establish an industrial sector investment emphasis. Industry attractiveness within each broad economic sector dictates the target exposure. Determined to maintain a discipline of diversification within our economic sectors, each weighting will vary between 50% and 200% of that sector’s percentage of the S&P500. This broad industry representation provides prudent diversification without the constraints that would result in closet indexing. After target exposure has been determined, individual security selection begins.

Bottom-up fundamental analysis incorporating revenue growth, asset to book values, debt to asset ratios, and cash flow metrics are all considered in selecting securities. Fair valuation is determined by implementing an iteration of a Dividend Discount Model, after discounting future dividends and an earnings based 5-year terminal value. Company and management quality, current earnings and projected earnings growth all provide key inputs to this analysis. Our valuation and appreciation expectations are further confirmed with 3rd party research and review of a company’s conference calls and S.E.C. filings.

Fixed Income Management

The primary focus of our intermediate active-duration fixed income investment style is on managing portfolio duration. Duration is a measure of the volatility of a bond’s price with a given shift in interest rates. Actively managing the duration, or interest rate risk, of our portfolios allows us to maximize return in a declining yield curve environment while mitigating risk when our analysis suggests yields will rise. In addition to duration management, we will emphasize sectors or issuances that demonstrate improving credit opportunities.

The basis of our interest rate forecasts is rooted within our analysis of the economy’s prospects. A multi-scenario forecasting methodology is employed that considers the three most likely economic scenarios. These scenarios are then weighted for the probability of their outcome. Each economic scenario is followed by a forecast for the yield curve in that respective environment. From our yield curve forecast we calculate the weighted expected return at each maturity level.

In addition to the interest rate curve analytics, individual bond issuers are analyzed by the fundamentals of their underlying business. Metrics such as current debt coverage, cash flow, competitiveness, and earnings outlook are all considered.  Third party credit ratings and ratings outlook as well as issue size and trading volume enable us to determine if the issuer and issuance warrant investment in our client portfolios.

Non-core allocations

Our growth at a reasonable price (GARP) equity style and intermediate active-duration fixed income style are sufficient in meeting the core investment needs of our clients. Often we feel it is important to add further diversification to our client portfolios. When non-core allocations are prudent, we will utilize mutual funds, Exchange Traded Funds (ETFs) or 3rd party separate account managers through custodial relationships. Non-core investment styles can include small capitalization equity management, international equity management, and high-yield fixed income, to name a few.

These additional asset classes achieve our goal of minimizing the volatility of a portfolio while maximizing the expected return.

The result of this strenuous process is an equity portfolio of 25-35 individual securities strategically diversified amongst the ten broad economic sectors.

Portfolio Rebalancing

Our portfolios are not static; instead our ongoing analysis continuously monitors, reviews, and if necessary, rebalances them. Economic forecasting is an iterative process that affects our strategic portfolio allocation, sector emphasis, and position adjustments. We recognize that with rebalancing comes frictional costs of management, commission charges and the realization of taxable capital gains. Our portfolios are managed with that additional cost in mind and we are determined to minimize their effects on the long-term return of the portfolio.