The “Diversified Value” product is an actively managed, concentrated U.S. equity portfolio of approximately 50 holdings. The preponderance of holdings are large cap, Russell 1000 stocks with a sampling of mid cap and occasionally small cap stocks.
The philosophy is based upon the power of compounding dividends. Superior long term equity returns result from the ownership of high quality companies that consistently maintain sufficient revenues and free cash flow to the degree that they could not only pay a dividend but could increase their dividend payments if they elected to do so. These companies tend to be slower growing entities that do not necessarily need to plow back cash into their own business in order to fund their growth. As a result they tend to be larger, blue-chip types of companies, which are held in the portfolio for several years at a time. Short term earnings and growth are less important with this discipline. There is a value tilt to the strategy, as it is important to add companies when valuations are attractive; however, these measures may or may not coincide with traditional valuation measures such as price to earnings or price to book.
There is no market timing as portfolios are always fully invested. The total emphasis is on the fundamental characteristics of the companies as operating entities and security valuation. Since turnover averages 20-25% annually, the importance of insightful trading techniques or technical analysis is minimal.
WCB has been managing the strategy since 2005, initially as an income alternative for the family members of our staff, and in more recent years for institutional clients. WCB has a very long history as a fixed income firm specializing in corporate bonds. We have applied to equity securities an analysis of company cash flows much like the one that we utilize in evaluating corporate fixed income credits. Said approach begins with the question, “Will the company generate sufficient cash flow to be able to pay interest (or dividends) and principal (increasing dividends) obligations?” The strategy results in long-term oriented, high-quality, and highly diversified value portfolios that have very low turnover. The stated objective involves taking a long term view based upon balance sheet sustainability more than the income statement. We have the unique freedom of not needing to rely on factors such as earnings, earnings estimates, or even the stock price in the short to intermediate term.