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Within a balanced portfolio, the equity portion is managed using Rorer's Large Cap Relative Value Strategy. This is a highly disciplined approach to stock selection and portfolio management. Two proprietary quantitative screens are used to evaluate stocks in terms of valuation and earnings momentum. The valuation screen stresses “relative valuation” and focuses on five financial ratios: P/E, P/B, P/CF, P/S, and dividend yield. Each measure compares the current valuation with the company’s five-year historical norm relative to the market. The earnings momentum model evaluates near term First Call consensus estimate revisions and positively scores companies that are experiencing upward revisions and positive earnings surprises. Fundamental analysis and investment strategies are the final determinants for security selection. Strong sell disciplines are designed to realize upside price objectives, reduce portfolio volatility, and reduce specific issue risk.
For detailed information on the investment process for the equity and fixed-income portions of this portfolio, please see the process pages for the Rorer Large Cap Separate Account Strategy and Rorer Fixed-Income Separate Account Strategy.
The bond portion of a balanced portfolio is managed using Rorer's Intermediate Term Fixed Income Strategy. This strategy focuses on high quality intermediate term bond holdings, with an average maturity of 4-5 years. A typical portfolio contains approximately 15 investment grade bonds, including government Treasury and Agency securities, as well as high quality corporate bonds when portfolio size allows.
Rorer's fixed income process begins by analyzing economic and market conditions. Rorer seeks to capitalize on this analysis by being longer, neutral, or shorter than the index as conditions dictate. However, they also seek to control the portfolio's volatility by adhering to a duration boundary defined by a 20% range over or under the duration of the index, measured in years. The ultimate duration and average maturity of the portfolio are determined by analyzing the yield curve. Rorer seeks to find select opportunities in various points along the maturity spectrum. The goal is to find pockets of maturities that provide attractive relative value characteristics, measured on both current and historical bases.
Ideal Investment
The ideal equity company typically exhibits many of the following traits:
- Strong financials
- Competitive positioning
- Good management
- Sustainable future growth and earnings momentum
- Positive earnings surprises
- Attractive Relative Valuations
The ideal fixed income security typically exhibits many of the following traits:
- High quality securities
- Intermediate-maturity focus
- Highly liquid, widely marketable bonds
- Attractive relative valuations in both sector and maturity
- Investment grade companies with improving credit characteristics
Portfolio Construction
Rorer's target asset allocations range from 65% to 55% for equity and from 45% to 35% for fixed income with a predominant asset mix of 60% equity and 40% fixed income. However, variations around this asset allocation have and will occur due to market fluctuations and target allocations as defined by a client's investment policy statement of objectives and guidelines. For the equity portion of the strategy, portfolio management:
- Performs quantitative research that screens for those stocks that are included in the S&P 500 Index and the Russell 1000 Index, which are U.S. domiciled, have five years of trading history, and have market capitalization in excess of $5 billion
- Employs a rigorous quantitative screening process designed to filter out a list of potential purchase candidates based on two factors:
- Attractive Relative Valuation
- Earnings Momentum
- Uses a valuation methodology to identify those companies trading below historic valuation norms relative to the market, as defined by the S&P 500
- Measures earnings momentum to identify those companies that are experiencing upward earnings estimate revisions from the analytical community and, thereby, have the best potential to provide positive earnings surprises
- Utilizes a team approach to leverage stock ideas and research to arrive at buy/ sell decisions in the portfolio
For the fixed-income portion of the strategy, portfolio management:
- Only purchases investment grade securities with an emphasis on U.S. Government bonds
- Limits non-government holdings to 5% per security and 10% per issuer
- Utilizes corporate bonds as a value-added sector to the portfolio
- Exposure is determined by the relative value advantage of each issue
- Chooses individual issues based on analysis of the company's operations and on the relative attractiveness of the yield spread, both in current and historical terms
Sell Discipline
Rorer’s sell process seeks to realize profits after they have been earned, or conversely, to conserve capital when circumstances dictate. Rorer’s Balanced Strategy incorporates the same sell disciplines that are used by the firm’s Large Cap Relative Value Equity Strategy.
The investment team will make a sell decision when:
- A security reaches the predetermined price at which the additional risk of keeping it exceeds the prospect of greater price appreciation
- A security reaches 6% of the Portfolio’s value because of capital appreciation, in which case the security will be either sold completely or scaled back.
- A security, from the firm’s average price, under-performs the S&P 500 by 15% on a relative basis
- A company displays deteriorating fundamentals
Investment Process Chart
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