Individual Portfolio Management
Texas Institutional manages individual "small-cap" and "mid- to large-cap" growth
portfolios that have and average of 25 to 30 holdings each. (An "all-cap" growth
portfolio is also offered by combining the two portfolios. The "all-cap" portfolio will hold
between 50 and 60 stocks.) Small-cap portfolios are comprised of stocks with market
capitalizations of between $300 million and $3.0 billion. Mid- to large-cap portfolios
contain stocks with market capitalizations greater than $3.0 billion. (Of note, the market
capitalization criteria can be adjusted to meet individual client requirements.)
Individual portfolios are built using Texas Institutional's proprietary stock selection
process. The "process" is unique and certainly innovative. However, it is based on a
thorough analysis of market fundamentals and pricing trends. The "process"
capitalizes on the experience of the management team and is enhanced by the
integration of two separate proprietary stock selection computer models. The
combination of these two models identifies and then isolates true growth opportunities.
Stocks that pass these two hurdles are candidates for further analysis and
consideration. Investment decisions are made following a stringent technical and
fundamental analysis. (see process summary below)
Resources
Texas Institutional utilizes an array of information technology resources for equity
research, analysis, and trading. The management team's top priority is to ensure any
and all resources necessary to maintain a strategic advantage are immediately
available at all times. Simply put, if a computer program, database, web-site, stock
screen, system, newsletter, or any other resource were available that could enhance
the investment management process, Texas Institutional would acquire it.
Just as important are the resources Texas Institutional does not utilize:
- Texas Institutional does not utilize any "sell-side" institutional research. The "process" is
self-contained. Even today, stock recommendations from major Wall Street brokerage
firms are biased and unreliable. However, the firm does purchase independent
third-party research from highly respected providers.
- Texas Institutional does not have any "soft-dollar" relationships. The firm does not
receive any investment management or administrative resources through "soft-dollar"
contracts. Typically "soft-dollar" contracts do not benefit the investor. Texas
Institutional will not compromise the requirements for long-term, world-class portfolio
management for short-term benefits. This way Texas Institutional can always seek
best price and best execution for its clients.
Fee Schedule
* minimum annual fees may apply
Portfolio Management "Process" Summary
The Texas Institutional portfolio management "process" combines both fundamental
and technical research. This "process" is applied to all market capitalizations and is
used for all client portfolios.
The "MOA" Growth Screen
Investment ideas are generated using Texas Institutional's proprietary "MOA" growth
screen. The screen was meticulously developed by processing historical data dating
back to 1950. The research identified certain key growth criteria most stocks exhibited
prior to a steady 5-year period of significant and consistent price appreciation. The
"MOA" incorporates the invaluable data by actively screening any universe of stocks
(such as the Russell 3000) to filter stocks that meet all of the required levels of
acceleration and comparative performance. The "MOA" provides a list of stocks that
can be classified as true growth opportunities.
The Competitive Quantitative Scoring System
Once identified, the screened names are then subjected to a unique and proprietary
"competitive" stock scoring system that grades a stock's relative fundamental outlook.
The system provides a quantitative snapshot of the stock's potential and allows direct
comparisons of stocks across industries and sectors. The premise behind the system is
that all stocks are "competing" for a limited pool of investment capital. The competitive
scoring system is a tool used to determine the relative attractiveness of a stock to most
market participants. Screened stocks that score very high are candidates for further
consideration.
Grunt Work
The two steps outlined above "weed-out" the majority of potential growth stocks,
leaving only a few each week for final analysis. The combined efforts of the three
co-portfolio managers can now be focused on a few significant opportunities. Potential
holdings are subjected to a thorough and documented fundamental and technical
analysis. Digging deep inside the story, Texas Institutional's fundamental analysis
focuses on cash flow, earnings quality, competitive advantage, market leadership,
capital investment, debt exposure, and potential dilution. Valuation and
macroeconomic factors are also diligently evaluated. Technical analysis includes
trend lines, price/volume, relative strength, Gann angles, and Fibonacci retracement
lines. Finally, a thorough understanding of the company's "growth story" is developed.
Basically, the management team wants to know how and why the company will take
advantage of its market position and outperform its competition.
Final Decision
After the above steps are completed, the three co-portfolio managers together decide
if a name will be added. All three managers must agree to purchase the stock. Each
manager can veto the purchase. Once purchased, a stock will remain in the portfolio
until it meets one of the sell criteria below.
Portfolio Construction
Only stocks that currently meet the comprehensive buy criteria will be purchased for
client portfolios. Holdings will be purchased at a level of 3-6% of the individual portfolio
market value. Portfolios will hold a total of between 25 to 30 stocks. This focused
portfolio strategy minimizes unsystematic risk while taking advantage of the growth
opportunities identified by the team.
Sell Criteria
1) Each holding is limited to 10% of the total portfolio. If a holding grows to a level
greater than 10%, it is reduced accordingly.
2) If a stock declines over 20% from its post-purchase high, and does not
immediately recover, it will be sold.
3) If the reasons underlying the original purchase no longer apply (the growth
story changes), the holding will be sold.
4) If a company announces a potentially dilutive event, such as a shelf
registration or convertible debt offering, the holding will be sold.
5) If the management team uncovers a more attractive and appropriate
investment opportunity, the holding will be replaced.
The Result
The end result is a diversified investment portfolio comprised of:
- Companies that are positioned for internally funded, consistent growth.
These are the most competitive companies in their respective industries. They have
invested in the necessary assets to provide a catalyst for growth. More importantly,
these companies should not need to tap the financial markets to fund future operations
or capital expenditures. These companies are capable of financing their growth
internally. They have an adequate amount of free cash flow to take advantage of their
market leadership position.
- Stocks that are reasonably and identifiably undervalued relative to their growth potential.
We focus directly on the current value of the stock, and look to invest in stocks priced
below that level. This will provide an opportunity to hold stocks that are priced at a
level that anticipates "accelerated price appreciation". In other words, we expect the
price of the stock to grow faster than the company itself.
Disclaimer
The information provided is for informational purposes only. It should not be assumed that
investment strategies discussed or provided will be profitable or will be consistent with past
performance. Data provided regarding past, current, or potential future portfolio holdings are not
intended to represent investment recommendations. Information and opinions provided do not
have regard for the specific investment objectives, financial situation, or specific needs of any
individual or organization that may obtain it. Information provided is not to be relied upon in
substitution for the exercise of competent, independent judgement. Investors should seek
professional financial advise regarding the appropriateness of investing in any of the securities or
investment strategies provided. The investment strategies, securities, and portfolios provided are
volatile and may have a high level of risk. The potential to underperform or suffer significant loses
exists. Past performance does not guarantee or indicate future results.
