Top Stock Portfolio
The investment strategy for Heritage Capital’s Top Stocks equity management program is based on a very simple philosophy: “Own the best and ignore the rest.” In short, the focus is on owning only the top rated stocks (as determined by HCM's rating system) in each of the S&P 500’s ten economic sectors. Our management approach for the Top Stocks program has three primary tenets:
I. Maintain Sector Weighting equal to S&P 500
II. Own the Top Rated stocks in each Market Sector
III. Manage Risk during severe market declines
We start by maintaining sector weightings equal to those of the S&P 500 index. Our “sector neutral” approach is employed primarily to ensure that the program benefits from broad market movements. In addition, this strategy helps create a well diversified portfolio.
We then focus our stock selection efforts on the top rated stocks within each sector. Instead of owning the biggest companies in each sector as the unmanaged S&P 500 Index does, our approach is to own only a select few of the highest rated stocks (as determined by our models) in each sector.
Finally, we believe it is imperative to manage risk during severe market declines. We believe that if given a choice, few investors would want to remain fully invested in stocks during severe market declines. Thus, when our managers feel that risk has become high, we strive to reduce the number of holdings in the portfolio.
Identifying the “Top Stocks”
The Top Stocks program employs a disciplined stock selection method designed to identify the top rated stocks within each industry. Each week, every stock in our universe, which is made up of ~1600 of the largest, most liquid stocks traded in the U.S., is ranked in terms of earnings strength and company performance. In addition, the system ranks 10 market sectors, 20 industry groups, and 109 sub-industry groups for performance and momentum. It is important to recognize that this is NOT the typical "earnings momentum" type of formula that became so popular in the late 1990’s. Our system for determining a company’s earnings strength and performance includes hundreds of indicators and includes (but is not limited to) the analysis of:
In short, only those stocks with the strongest performance and earnings strength (as defined by our rating systems) "make it" into our Top Stocks universe.
Risk Management Strategies Built In
As anyone who has experienced a down market can readily attest, man does not live by stock selection alone. Let’s not forget that the average growth fund (as defined by the Lipper Large Cap Growth Fund Index) lost -64% during the bear market period of 3/31/00 - 3/31/03. Therefore, the Top Stocks program employs a long-term risk management strategy.
While we can’t guarantee our objectives will be realized, HCM’s risk management strategies are designed to first identify, and then stay “in tune” with the market’s "big-picture” cycles. This means that when our major market models are in a bullish mode (indicating risk of a severe market decline is low) we will maintain a fully-invested strategy focusing on the top stocks in each market sector.
However, when our models indicate that market cycles have turned bearish, we will shift our strategy and utilize our proprietary “graduated method” of managing exposure to market risk. During these bearish periods, the goal is to keep exposure to market risk “in-line” with conditions.
A Few Details
Below is a summary of some of the logistical details of the Top Stocks program:
- The portfolio is comprised of approximately 50 Stocks
- Positions are equal weighted (1.5% - 2.2% each)
- Top Stock Ratings are recalculated weekly
- Minor adjustments to the portfolio are made each week
- Sector Allocation are rebalanced monthly
- Risk Management assessments are performed weekly
- Client Assets are held at Trust Company of America (TCA)
- Clients have online access to their accounts 24/7/365 via TCA's website
- Tax accounting summary provided by TCA each year
- Minimum Account Size: $25,000
Here's the link to the current Top Stocks Strategy Brochure
Here's the link to the current Top Stocks Strategy Performance
