My father started The Fiduciary Group over 40 years ago with the idea that clients would come to him primarily for trust and estate administration (he previously worked in, and ultimately was the head of, the trust department of a local bank). Early on, he found that more and more clients wanted him to manage their personal investments as well. He did such a good job at managing portfolios for these clients that word of mouth referrals brought in more clients and investment assets, and the firm thrived. His fundamental approach to investment selection is shared by me and our portfolio managers today and has helped to shape our firm’s investment strategy over the years.
My father is a naturally positive person and he has always held a firm belief in the power of American business to achieve solid growth over time. He implemented this investment philosophy by investing client accounts in large domestically-based companies with operations overseas. The common characteristic of these companies was that they had a history of solid growth and also shared their profits with shareholders by regularly distributing generous dividends to shareholders. He also purchased high quality bonds to generate a safe and consistent cash flow for client accounts. This investment philosophy has stood the test of time and continues to be an important foundation of our firm’s current investment strategy and overall asset allocation approach.
Around 30 years ago when my father was in the prime of his business career and actively investing client accounts, he would invest directly in individual securities including stocks and bonds. The stocks he selected were generally household names like Coke and Exxon and the bonds he acquired were typically State and local municipal bonds. Stocks would be purchased with the intention of holding them indefinitely while bonds would be held until maturity. Because cash earned anywhere from 5-7%, these portfolios would have a fairly high cash position as well, maybe 5-10% of the overall account value.
Today, the equity portion of a large growth-oriented portfolio shares many of the characteristics of a portfolio of 30 years ago, but with some important differences. We continue to invest in individual securities, but our purchase list will also include stocks that don’t pay dividends, and also some large companies which are based outside the United States. When we invest in a company today, we intend to hold it only so long as it continues to perform in line with expectations. We monitor all of our holdings on a continuous basis, so we don’t necessarily subscribe to the “buy and hold” philosophy any longer. We are focused on the total return of a security which means we seek an income return as well as appreciation. For smaller accounts, as an alternative to investing in individual securities, we will use actively managed mutual funds and exchange traded funds that invest in large-cap US-based companies.
While we build core positions in large US-based companies, we also like to have satellite positions that are invested in smaller, faster growing companies, and companies from emerging economies with higher growth rates like India and China. These types of securities have share prices that might be more volatile than larger US-based companies. So rather than invest directly in these types of companies, we utilize mutual funds and exchange traded funds (ETFs) to achieve our asset allocation objectives in these areas. By investing in mutual funds and ETFs which hold many individual securities, our portfolios get the equity representation we seek without exposing the portfolio to the risk that any one of these small or foreign companies might decline significantly in value.
The fixed income portion of a typical portfolio looks much different today than it did 30 years ago. Then, interest rates were fairly high. Now, interest rates are very low so that bonds on the whole are much less attractive investments these days. Because we believe that interest rates will likely rise in the next year or so, we think it is important to keep durations of fixed income portfolios relatively short in order not to suffer principal losses once interest rates rise. Rather than invest exclusively in individual bond issues, we also use mutual funds and ETFs for our fixed income allocation. An additional difference in the non-equity portion of portfolios of today as opposed to 30 years ago is that most of our portfolios do not hold large cash balances because returns on cash are near zero.
Another significant evolution in our management of portfolios is our portfolio appraisal report. With much more advanced technology, today our portfolio reporting system provides time-weighted performance returns and updates positions, transactions, and valuations on a daily basis. Security holdings are displayed in a more logical manner, with individual stocks listed by economic sector, and funds listed categorically by market capitalization and domicile (domestic or international). Fixed income investments are similarly segregated by category including government, corporate, and high yield. We also provide appraisal reports on a consolidated basis for the entire household as well as statements for each individual account.
We are still managing a number of portfolios which we have managed for over 30 years, and these portfolios have benefited from the overall investment strategy initiated by my father. We have adapted our strategies over the years to focus on total return, and also by adding some additional asset classes. We have expanded the menu of investments to improve diversification and introduce more non-correlating positions. We have grown our team of skilled professionals and significantly enhanced our processes and resources to allow us to serve our clients even more effectively. My father’s fundamental belief in American business success has never wavered over the years, and it continues to be a guiding principle behind our investment philosophy today. His advice continues to resonate with me each and every day.