Portfolio Management
Farr, Miller & Washington works with individuals/families, estates/trusts, foundations, institutions and endowments, and retirement funds providing each with the special attention and insight they need.
Overall Design of Portfolios. Client portfolios are designed to be diversified and to limit risk according to defined client objectives and to perform well over at least a three to five-year business cycle. Individual equity positions are typically 3% to 5% of the total portfolio while industry concentrations are usually limited to about 20%. Bond portfolios will also be diversified in order to limit client exposure to any single issuer. With this diversified approach, Farr Miller & Washington intends to achieve participation in positive markets and limit exposure to market downturns.
Portfolio Characteristics. Stocks in client portfolios typically share the following characteristics: 1) a consistent long-term earnings track record, 2) an excellent balance sheet, 3) strong free cash flow generation, 4) high returns on invested capital, 5) prospects for above average earnings growth over the next market cycle, and 6) reasonable Price/Earnings ratios. Bond allocations are typically filled out with some combination of U.S. Treasuries, U.S. Agencies, Investment Grade Corporate bonds, and/or high quality municipal bonds. FMW bond portfolios are managed to generate income and to reduce volatility in a client’s portfolio. The firm’s philosophy is to never take on excessive risk for a little extra yield in the bond market.
Risk of Market Timing. Market timing does not work. History provides ample proof of this fact. Farr, Miller & Washington attempts to buy high quality companies at reasonable valuations and sells them if they become overvalued or if fundamentals deteriorate. Market timing is risky because it feels right to buy when the news is good and stock prices are high and feels right to sell when the news is bad and stock prices are low. This is typically the exact opposite of what a prudent long-term investor should be doing. At Farr, Miller & Washington, sticking to our well-established discipline keeps the firm from making emotional decisions in client portfolios.
International Investments. Although we provide advice regarding international investments and recommend some international exposure using Exchange Traded Funds (ETFs), our preference is to invest in domestic companies. Accounting standards are more uniform and domestic companies report their financial status more frequently. Roughly 30% of the revenues derived from our portfolio of companies come from international sources. In other words, U.S. multi-national companies in our portfolios are already providing our clients with some of the diversification associated with owning international stocks.