SFM believes in taking a global approach to the investment process. The ongoing globalization of trade and the freedom of investment capital to cross national borders creates investment opportunities around the world. Using a historical and current analysis of the risk/return profile of the asset sectors we follow, SFM will build a tax efficient portfolio that will target your financial goals at the lowest level of risk. We have a value bent and like to see strong business, thematic, and economic fundamentals underlying our strategies. Following are some of the investment components that we analyze when managing our clients' money.
SFM carefully reviews cash flow, earnings, sales, and book value multiples of both the business in question and the industry in which that business operates. We examine historical, current, and forecasted fundamentals to determine the relative attractiveness of a particular company compared to its peers. We look for businesses that are currently being unjustly punished by the market. Our long term perspective allows us to avoid investments trading at huge P/E multiples founded on the presumption that everything will be perfect for an extended period of time. This is where "meltdowns" can occur (stocks dropping 40 – 60 % within a period of hours).
SFM spends a significant amount of time managing risk. For every incremental increase in risk, an investment should offer an incremental increase in return. The simple fact is, some do and some don't. When we allocate your capital, we look at thousands of potential investments. The first thing we ask ourselves is "Are we being paid for the inherent risk in this investment vehicle or is there a safer way to capture the same level of return?" Many investments contain high levels of nonsystematic risk without a commensurate increase in projected returns. These are the types of investments we keep our clients out of. We are not going to accept a 9% return from a 'B' rated security if we can receive the same 9% return from an 'A' rated security. We are not being compensated for the additional credit risk. Following is a list of investment risks that SFM considers:
Value Adding Managers
Great fund managers are hard to find; however, they do exist. SFM analyzes the history of the markets and results of active managers to determine which geographic or industry sectors are best represented by an index and which sectors are best represented by an active manager. We closely monitor the actively managed funds in which we invest our clients’ capital in the following ways: Attend fund conferences, hold individual fund meetings, listen to quarterly conference calls, discuss changes in fund strategies, review performance history, and more. Although it is more expensive to invest in an actively managed fund, we find that the right manager in the right sector can add enough alpha to justify the price.
SFM's investment goal is to invest in an unconventional way when we think that the consensus opinion is wrong. Following the herd of the market is a very dangerous practice. Humans are irrational creatures that sell too much when they are fearful and buy too much when they are greedy. They also find comfort in investing in companies that their peers are buying. We try to identify when the market is acting irrationally and invest in a contrarian way to capitalize on the mispricing. Focusing on moving against the wave of the market allows SFM to buy companies trading at unjustly low prices and sell companies trading at exorbitantly high levels.
Large Margin of Safety
Accurately calculating an investment's intrinsic value is the hardest task a money manager is faced with. SFM believes that markets are inefficient and that value can be added by performing company specific research to uncover mispriced assets. It is for this reason that, through both proprietary and third party research, we formulate intrinsic values for the investments that we own. We use these values as a yardstick to measure how overpriced or underpriced securities are. Investing in a stock that is trading far below its perceived intrinsic value (the stock's price is far below what we think the stock is worth) provides us with a margin of safety and decreases the chances of permanent loss of capital.
Diversifying a portfolio is a free, risk reducing exercise; but, over-diversification limits relative performance. Warren Buffett once said that, "Wide diversification is only required when investors do not understand what they are doing." For this reason, we put it upon ourselves to find the right balance of diversification. To achieve this balance, SFM invests on a global scale and across many asset classes. We take it a step further by spreading capital across different companies, industries and sectors. This practice allows clients achieve a well-balanced, diversified portfolio that can capture the value of the global markets but still protect against downside risk.