Large Cap Core Opportunistic Equity Process
The firm's core investment philosophy underlines growth at a reasonable price utilizing
large cap securities in an effort to provide short-term preservation of principal
and long-term growth of assets. This disciplined investment process is designed
to manage risk at every opportunity through portfolio diversification and active
management. Although Valley Forge Asset Management, LLC (VFAM) does change weighting in various sectors, there has never
been a dramatic change in VFAM's process. All portfolios are broken down into three
sections: total return, growth and value stocks, which allows the firm to increase
exposure to favored sectors of the market, determined by the firm's top-down analysis,
while selecting best in class performers using a bottom-up stock selection. The
top-down approach employed by VFAM's equity investment committee starts with VFAM's micro
and macroeconomic reviews, and an analysis of Wall Street and internal research. The
bottom-up security selection process employs an in-depth fundamental and technical
analysis of the specific issue considered for purchase, and its strength and risk
relative to other securities in the sector, and client-specific security guidelines.
This analysis furthers VFAM's investment philosophy of managing risk, preserving
capital, and long-term asset appreciation. This strategy is deployed by a team of
portfolio managers under the direction of VFAM's Co-Chief Investment Officers, James
Gibson and James Vogt.
The equity portfolios under VFAM management are diversified and sector-weighted.
Industry growth prospects and economic sentiment are major considerations in the
portfolio construction process as risk reduction through diversification remains
a focal point. Consequently, this disciplined philosophy mandates that no individual
sector will exceed 25% of the total portfolio, and no individual security will exceed
5% of the total portfolio assets. When fully invested, portfolios contain a manageable
number of issues, typically 45 to 55, to further diminish individual security risk.
As an equity manager, VFAM constantly reviews both price target expectations and
market sector performance relative to defensive and opportunistic strategies. The
top-down analysis and subsequent sector research will determine how the portfolio
is positioned relative to value, growth and total return.
The Large Cap Core Opportunistic Equity process starts with the equity investment committee's
top-down analysis of current and projected macroeconomic conditions. This eight member panel
meets on a weekly basis to discuss relevant market issues and their effect in the capital
markets. This top-down approach considers numerous worldwide economic factors such
as: estimates for growth in the world's major economies, commodity price forecasts,
interest rates and interest rate forecasts, currency prices, wage pressures, job
growth, PPI, CPI, GDP and other factors. These factors are used to determine which
sectors and industries the firm believes will offer the best risk/reward relative
to the market. Selection criteria include consistent and predictable earnings, solid
fundamentals, seasoned management and reasonable valuations while existing equity
valuations are under constant review.
VFAM's stock selection is driven by a bottom-up evaluation of individual securities'
sensitivity to interest rates, current and future political situation, global economic
conditions, PPI, CPI, GDP, commodity prices, job growth, monetary and fiscal policy
and other factors. These factors help determine which sectors/stocks VFAM sees value
in and which sectors/stocks are over-owned or over-valued. These factors, as well
as many others, help create a list of candidates for purchase.
Once the top-down analysis indicates in which sectors and industries VFAM should
invest, the bottom-up stock selection process begins with a comprehensive fundamental
and technical analysis. From a fundamental standpoint, securities are reviewed based
on a corporate financial analysis including balance sheet strength, debt obligations
and relative valuations such as Price to Book, Price to Sales, Price to Earnings
and other fundamental metrics. The firm then analyzes company cash flow trends,
the consistency and forecast of quarterly earnings, dividend yields, management's
history with respect to growth initiatives, their market position, current product
lines, future drivers of earnings and other relevant fundamental information relative
to the overall risk/reward scenario.
VFAM's technical review begins with an evaluation of market supply and demand characteristics
with respect to historical stock trading activity. The firm also utilizes Dorsey
Wright & Associates and ChartCraft's point and figure analysis databases for relative
strength comparisons versus their peers and the market. Schaeffer Research and VFAM's
internal expectation analysis are used to determine market sentiment. Other technical
data used by the firm includes trend analysis, buying or selling climaxes, options
positioning, moving averages and support and resistance levels. Portfolios typically
are fully invested within 90 days, dependent upon market conditions, attractive
buying opportunities, perceived relative equity market risk and VFAM's short-term
outlook on the market. Should a client request a more immediate investment approach,
VFAM will execute an expedited investment timeline.
VFAM employs a rigorous sell discipline in an effort to control portfolio risk,
preserve capital and lock-in capital gains. The firm's sell discipline is multi-faceted
considering price targets, current market outlook, risk/reward scenario, growth/decline
of market share and fundamentals, and the probability of continued price appreciation.
Technical analysis and historical valuation ranges are used to establish target
prices for all equity issues. When initial target prices are met, VFAM reevaluates
the current market conditions. If management believes there is more upside in price
before the stocks are fully valued, or simply put, VFAM believes the risk/reward
scenario is still in the investor's favor, VFAM will continue to hold the securities
and maintain their respective positions. Once the stock reaches “fully-valued” price
levels, management typically will sell a portion of its position and set new price targets
for the remaining portion, otherwise known as averaging out of a position. In specific
cases sales may be executed primarily to protect the generous gains that have accumulated.
The firm's sell discipline dictates the sale of issues that consistently underperform
the market and/or their peer groups by 20%. Deterioration in the issue's fundamentals
or a lack of earnings consistency may also prompt security sales.
VFAM defines risk as the potential loss of principal (75%) or, secondarily, underperformance
relative to the benchmark (25%). If VFAM believes the market has more downside risk
than upside opportunity, then management will lower the overall beta of the portfolio
and shift to sectors that it feels will outperform when the market declines. VFAM's
investment philosophy is always “the short-term preservation of principal and secondarily
the long-term growth of assets." Consequently, Large Cap Core Opportunistic Equity portfolios
will rotate among sectors and growth, value and total return holdings relative to
the firm's overall risk/reward assessment.
VFAM adds value compared to the established market benchmark by utilizing the firm's
core opportunistic approach in rotating weightings among sectors and market capitalizations
based on VFAM's capital and economic outlook, monetary environment and fundamental
and technical research. In identifying the favored or unfavored sectors of the marketplace,
VFAM will shift from value, growth and total return stocks. The firm is not pigeon-holed
to a certain style; rather, VFAM is obligated to find the most attractive sectors
or stocks that satisfy the firm's risk and reward parameters.
VFAM controls risk relative to the established market benchmark by increasing portfolio
cash levels in times of market uncertainty and purchasing stock in times when the
market is undervalued. Generally, cash levels are under 5% in the firm's institutional
accounts; however, if the client's investment policy permits, in extremely volatile
market conditions cash could reach up to 15% of the portfolio. If VFAM feels the
market is at a critical juncture, cash will be used as a preservation of capital
tool and the funds will be re-invested when market conditions offer more favorable
What differentiates VFAM from other managers are the firm's unique process, stability,
performance track record and the depth of experience of the firm's investment committee
members and senior management. The firm believes outperformance is obtained from
starting with a top-down macro-economic analysis that causes the firm to rotate
from unfavored to favored sectors of the market. VFAM is able to accomplish this
due to the investment committee's extensive experience in investment management
dating back over forty years. The firm has successfully managed assets in both bull
and bear markets. The strong value of preserving principal and participating in
market upswings should benefit clients in the coming years. The old “buy-and-hold”
strategy of the 1990's has not worked over the past several years. The firm expects
this trend to continue, which benefits a more active approach such as VFAM's.
Fixed Income Process
VFAM's fundamental approach to fixed income begins with a top-down analysis of the
economic and political factors that are likely to influence the macro and micro
economic landscapes. Once the most likely scenarios have been identified, the yield
curve is analyzed to determine the most attractive maturities. Portfolios are constantly
fine-tuned along the yield curve to reflect VFAM's current economic outlook and
to take advantage of disparities that might occur from time to time.
The firm believes that movements in short term interest rates are random, therefore
VFAM does not attempt to enhance performance by predicting short-term moves. On
the other hand, the firm looks to interest rate trends to help with the assessment
of domestic economic and monetary policies. Practiced consistently, the top-down
approach provides the firm's clients current income, reduced risk, liquidity, deflation
protection and inflation-adjusted real returns. VFAM does not assume any increased
risk or chase yield in an effort to boost returns. Higher yielding corporate issues,
when employed, consist of well-known, top quality companies with a solid balance
sheet and ample interest coverage.
Corporate issues are employed, when appropriate, with government issues due to their
potential to enhance the overall return of a portfolio. Corporate issues are selected
based on a detailed analysis of both the security and the underlying issuer. This
credit or quality analysis primarily evaluates the issuing company's financial strength
and their ability to service debt. VFAM also considers the liquidity of the security
and the level of call protection. In addition, the firm looks to identify characteristics
of the security issuer that could result in an increase in the security's market
In addition, VFAM will use taxable municipal and U.S Treasury and agency issues in the fixed
income structure. VFAM does a rigorous review on fiscal balance sheets, revenue
demographics, and coverage ratios to ensure only high quality issuers are purchased
The overall composition of corporate and government issues in a portfolio at any
one time will, however, reflect VFAM's views of the relative values currently available
from different sectors and maturities within the bond market.
In an effort to manage risk at every point, VFAM only purchases bonds
rated investment grade. The firm's primary focus is on high quality corporate bonds, U.S. Treasuries,
government agencies, municipals and money market instruments. Diversification is paramount to
the firm's investment style; therefore, no single issue may represent more than
10% of the portfolio. Taken even further, no single corporate issuer may represent
more than 5% of the portfolio. Depending on the size of the portfolio, VFAM likes
to hold a minimum of 20-25 issues. The yield curve is emphasized and a credit analysis
is conducted to ensure that the appropriate liquidity, industry diversification,
safety, maximum yield and minimal risk are achieved. The firm's desire to provide
liquidity and safety make it highly unlikely that a portfolio will hold an issue
of more than 10 years' maturity.
The average combined maturity of the securities held may be shortened according
to market conditions, but the average maturity will not fall below three years in
order to preserve capital if VFAM anticipates a rise in interest rates. Conversely,
the average maturity may be lengthened, but not beyond ten years, to maximize returns
if interest rates are expected to decline.
The firm's approach in monitoring credit, security and interest rate risk has historically
provided above average returns with reduced risk and volatility. Consistent with
VFAM's overall investment philosophy, investments in highly liquid intermediate
term maturities (2-10 years) and the investment committee's experience in predicting
interest rate and economic trends, has allowed the firm to focus on preserving capital
in any economic environment. This focus on quality and preservation has been a significant
benefit to VFAM's clients.
Revised July 2014
Your investment needs are our highest priority. To meet with one of our Wealth Management
Advisors, please contact Morgan Salazar 610-687-6800, 800-225-3518 or firstname.lastname@example.org.
- Securities, insurance products, and investment advisory services are offered through Valley Forge Asset Management, LLC. (VFAM) and is a SEC registered investment advisor, a registered broker-dealer (Member FINRA & SIPC), and a licensed insurance agency. VFAM is a wholly owned subsidiary & non-bank affiliate of Susquehanna Bancshares, Inc. (SBI).
- Susquehanna Wealth Management® is a registered service mark of Susquehanna Bancshares, Inc.
Securities and Insurance Products Are:
• Not FDIC Insured • May Lose Value • Not Bank
• Not a Deposit • Not Insured by any Federal Government Entity