Our core equity strategy is based on the Multi-Discipline Approach (“MDA”). DBIA has developed and employs the Multi-Discipline Approach to manage client portfolios. The approach is designed to provide consistent, above-average investment returns, with equal or less risk and volatility than the S&P 500.
There are three major investment disciplines employed by portfolio managers to manage portfolios. Each discipline allows the manager to select stocks based on certain criteria. These disciplines are sometimes referred to as investment styles. They are 1) Growth, 2) Value, and 3) Growth at a Reasonable Price (GARP).
The Growth manager looks for companies that have a good long-term growth of sales and earnings in addition to strong earnings momentum in the short-term. Generally these are popular, well-known companies, and are very rarely priced cheaply.
The Value manager looks for companies that are out of favor and have been beaten down to attractive or cheap prices. Value companies are generally companies that have had a decent long-term record but are experiencing short-term problems which have caused earnings to decline. The Value manager has to assess whether the decline is temporary or the beginning of a major decline or stagnation of earnings.
The Growth at a Reasonable Price (GARP) manager looks for companies that have above average earnings and sales growth but lower than the companies sought out by the Growth manager. Unlike the Growth manager the GARP manager is price sensitive. The GARP manager employs the combined analysis and valuation tools of the Growth and Value managers.
The MDA is based on the concept that in order to outperform the S&P 500 benchmark on a consistent basis you must have a properly diversified portfolio. Just as total portfolio performance is based on the appropriate asset allocation between stocks, bonds, and cash, equity performance is determined by appropriately allocating the stock selection between economic sectors. Further diversification between industry groups within each sector, and stock selection within each industry group, contribute to out-performing the standard benchmark.
Our core equity discipline diversifies the portfolio into eight economic sectors with weightings close to the weighting of these sectors in our benchmark, the S&P 500. Basically the portfolio is sector neutral to the S&P 500. We choose our individual stocks within each sector using our relative valuation model. The model determines a fair value, cheap value and an expensive value for any stock relative to the present S&P 500 valuation. From many companies within each sector we select those companies that are selling at fair value or below fair value to do further research. Theoretically, a stock selling below relative fair value has a positive risk/reward ratio or a higher probability of outperforming the S&P 500. Based upon our research and the relative valuations we construct a portfolio that is sector neutral and comprised of stocks that have a positive risk/reward ratio.
Our core equity discipline is designed to outperform the benchmark with lower volatility because, based on the structure, the portfolio has a positive risk/reward ratio.