Investment Objectives
The investment objective of the US Large Cap Core SMA strategy is to achieve long-term capital appreciation.
To meet this objective, the team will focus on:
- Owning a diversified portfolio of high-quality businesses.
- Balancing a preference for hold for the long term with respect for price and valuation.
- Earning acceptable returns on a rolling three-year basis, as measured by gross return at or above benchmark levels, upside capture of at least 100%, and upside/downside capture ratio greater than 1:1.
Portfolio Managers
Who should invest?
Investors who are seeking broad, domestic, large-cap company exposure for their portfolio should consider this strategy. Investors should have a long-term investment horizon of at least three years. We believe that buying and holding sound companies goes hand-in-hand with sound investing. We’ll combine these companies into a diversified portfolio with the aim of beating the S&P 500's total returns.
Philosophy and Strategy
The Large Cap Core SMA strategy seeks to identify, buy, and hold high-quality companies. To us, great companies have some combination of the following four traits:
- Management, Culture, & Incentives: Well-run companies have managers with intrinsic and extrinsic incentives to run the business with shareholders in mind, and who can allocate capital to grow the business, enhance competitive advantages, and reward shareholders.
- Economics: Good companies can grow faster than inflation and the overall economy. Using pricing power, operational efficiency, smart capital allocation, and strong business models, they position themselves to beat the market. A company can only stay or become good if it has the financial strength – a healthy balance sheet, sustainable cash flows and/or easy access to cost-efficient capital – to invest and grow the business at high rates of return and, when appropriate, return capital to shareholders.
- Competitive Advantages: Whether it’s valuable intellectual property, irreplaceable assets, economies of scale, high switching costs, or vast network effects, great companies have strong and durable competitive advantages.
- Trajectory: Good companies own significant or increasing shares of large and growing markets, and have substantial business optionality. A good company can become an especially great investment when its current market size is dwarfed by its addressable market.
Portfolio Management Process
Portfolio Construction
The Large Cap Core SMA strategy is generally composed of at least 20 positions. To limit the risks associated with highly concentrated holdings, the Large Cap Core SMA strategy will try not to allocate more than 10% of the model portfolio to shares of any one company.*
The portfolio managers regularly review and adjust the Large Cap Core SMA strategy’s allocations to maintain a diversified mix of investments that offer what they feel is the best overall potential for long-term growth of capital. Companies are likely to be sold if there are unfavorable developments affecting the company’s long-term prospects, if the value of the shares is no longer attractive, or if capital is needed to purchase a more compelling opportunity.
Investment Selection
The Large Cap Core SMA strategy employs a balanced investment strategy with respect to value and growth philosophies. In addition to the traits listed above, the portfolio managers require a valuation that is attractive relative to their assessment of future company performance, though their investment decisions are not dictated by the outputs of valuation modeling. The portfolio managers employ a long-term, buy-and-hold approach, ideally compounding value for shareholders over long periods of time.
Position Sizing
Positions at time of purchase will usually range in size from 2% to 5% of the model portfolio. In general, the upper limit on the position size for shares in any individual company is 10% to allow room for successful investments to appreciate in value. We will assess positions that fall below 2% to determine whether to buy more, hold, or sell the position and reallocate the capital.
Position Management
The portfolio managers maintain target allocations for each stock in the Large Cap Core SMA strategy, and monitor deviations of actual allocation from the target on a regular basis to ensure that desired exposures are maintained. The aim of managing exposures is balanced against the Large Cap Core SMA strategy’s long-term, buy-and-hold philosophy where the portfolio managers are mindful of minimizing unnecessary transactional costs.
The Large Cap Core SMA strategy does not attempt to time the market and seeks to stay fully invested.
Investment Risks
The portfolio managers are most concerned with managing losses due to factors related to company performance, such as poorer-than-expected earnings or management decisions, changes in the industry in which the company is engaged, or a reduction in the demand for a company’s products or services.
General market and economic factors may adversely affect stock markets generally, which could impair the value of the Large Cap Core SMA’s investments; we view these factors as impossible to time, but generally temporary in nature.
The portfolio managers strive to minimize company-specific risk by maintaining what they think are appropriate position sizes for individual stocks.
Please see Appendix B to our Investment Advisory Agreement for a discussion of additional risk associated with this strategy. A link to the Investment Advisory Agreement is provided at the bottom of this page.
* To the extent that we invest more heavily in particular sectors or industries of the economy, your performance will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any Model Portfolio, client portfolios may be significantly invested in a sector or industry, such as the information technology sector, as a result of our portfolio management decisions. Similarly, a Model Portfolio’s investments may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.
Each client portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. Motley Fool Wealth Management retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients, and we may modify allocations within a client's account subject to the constraints of each client's current risk score and objective. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios.