Stability-Based Portfolio

July 9th, 2011 by hackel Leave a reply »

 

You may have recently become aware of several new investment products based on portfolio stability factors. If you are interested in an equity portfolio composed of firms, which, by their nature, exhibit considerable financial stability, you should surely be attracted to CT Capital LLC. This is an area we have focused on for almost four decades.

Operating and financial stability have always been critical to risk analysis and investment performance, as well as how firms themselves should be managed, including capital deployment and financial structure.

Whereas the stability products that have been introduced by other firms are keyed off of quite basic metrics, the CT Capital LLC portfolio is based on a comprehensive array of detailed models that do not exist elsewhere. Our worksheets utilize both historical and real time data.

For example, a recently introduced product from a well-known firm uses balance sheet debt/equity as a stability measure whereas we include all forms of debt in our leverage ratios, including unhedged derivatives, unfunded pensions using real time assumptions, leases built in for growth (not the footnoted minimum amount), moral obligations, realism behind health care assumptions, workers compensation, purchase agreements, self-insurance, and so on. Other firms are using GAAP data; we use cash flow, and, where appropriate, normalized (smoothed) results. Our cash flow models adjust for firms which might have “managed” their assets to produce cash which, if not been managed, would have reported poor cash flows. This would include balance sheet and credit decisions geared to producing short-term cash when the financial structure is weakening as might be the risk of growth to prospective free cash flows.

We incorporate stability measures in everything we do, from sales and input costs to taxes (both effective and actual).

We evaluate and measure sovereign risk, insurance, litigation, patents, covenants, and any and all factors which might lead to a change in the firm’s stability. This, in fact, forms the basis of our cost of equity capital.

Half of our analysis is dedicated to cost of capital as it is the most important factor in risk analysis. Cost of capital and stability go hand and hand.

If you are an institutional investor, call us at CT Capital LLC and we will explain how a true stability led portfolio should be constructed.

 

 

Kenneth S. Hackel, CFA

 

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