the Sheet Smith Investment Manager’s Approach to Portfolio Management

 

Guiding Principles

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  • Asset class diversification among such instruments as stocks, bonds and cash can explain more than 90% of a portfolio’s long-term total return. Management of portfolio volatility cannot be ignored.

  • The S&P 500 Index outperformed U.S. Treasury Bills by over 1,800 percentage points over the past 71 years thru 1997.

  • Meanwhile, the S&P 500 Index slightly under-performed U.S. Treasury Bills if the top performing 37 months or 4.3% of the total are excluded. What’s more, the S&P 500 Index outperformed by over 365,000 percentage points if the worst 37 months could have been avoided.

We believe prudent management of capital market price volatility or risk through appropriate asset allocation decisions offers the best opportunity for successful investment results over market cycles.
— Cornell Bowden, Founder of SSIM

Dynamic Asset Allocation

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At Sheets Smith Investment Management, our Dynamic Asset Allocation investment process distinguishes us from other managers. Typically, the investment manager advises, and the client makes this important asset mix decision often resulting in a fixed allocation. The Result: An unmanaged asset mix. The variations of capital markets then become the strongest determinant of asset mix, creating overexposure at market highs and underexposure at market lows.

 
  • Dynamic Asset Allocation (DAA) provides diversified balanced portfolios offering the growth potential of stocks, the high income of bonds and the safety of cash equivalents.

  • DAA ensures a constant evaluation of each asset class of stocks, bonds and cash investments.

  • It also quantifies the relative attractiveness of each asset class by comparing expected returns and associated risks.

  • We are continually allocating capital to relatively undervalued asset classes in a Measured, Disciplined and Timely Fashion.


Approach by Asset Class

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ALL-CAP EQUITY APPROACH | Our approach to equity investing combines key principles found in both growth and value investment disciplines.

 
 
  • SSIM focuses on companies expected to experience above average relative earnings growth as a result of improving profitability.

  • Working earnings estimates are reinforced by focusing on the true measure of a company’s economic profitability - cash flow. Cash flow ROI is a key indicator of quality and the potential for earnings growth momentum.

  • The capital markets seem to efficiently price assets over the long term.  However, investor confidence causes stock prices to fluctuate widely in intermediate time frames.  SSIM monitors and waits for these circumstances to provide purchase and sale opportunities.

 
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FIXED INCOME APPROACH | Extraordinary volatility or risk have characterized the fixed income markets since the 1970’s.  Management of this risk is the cornerstone of our fixed income investment approach.

 
We believe that intermediate maturity securities offer the best long-term risk/reward payoff in fixed income markets.
— Greg Bowden, Portfolio Manager
  • Emphasis on managing portfolio duration through diversified bond portfolios with 2- to 10-yr maturities.  Longer maturities may be used in riskier portfolios, or when unusual potential total return appears to justify a small proportional commitment.

  • Target duration is determined by economic forecasts, including interest rate and yield curve projections.  This can result in a laddered, bell- or barbell-shaped maturity schedule.

  • Securities may include U.S. Treasuries, Government Agencies and investment-grade corporate bonds on a relative value basis.  Current market and quality yield spreads, as well as credit ratings, liquidity and call features, are considered where appropriate.