information for participants
Revised on March 31, 2003
This Information for Participants describes the availability of certain Common Investment Funds and portfolios, and the terms and conditions under which Missouri Baptist Foundation offers its investment services to Baptist and other qualifying charitable organizations. This Information for Participants is given in compliance with the Philanthropy Protection Act of 1995, and is addressed only to organizations in the categories described below ( see “Eligible Participants”) . This Information for Participants is not intended to be distributed to any other person or entity, or for any other purpose. There are certain investment risks associated with participation in the Investment Funds as described in this Information for Participants.
This information statement has not been reviewed or approved by the Securities Exchange Commission or any other federal regulatory authority. Any representation to the contrary is unlawful.
Missouri Baptist Foundation is not registered as an investment adviser and does not provide investment advice to participants or the common investment funds or portfolios described herein. Investment advice, if any, to participants or the common investment funds or portfolios is provided by separately compensated third party investment advisers who are registered under federal and/or state law or are exempt from such registration.
Who is the Missouri Baptist Foundation?
Missouri Baptist Foundation, a Missouri nonprofit corporation, was incorporated in 1946 by incorporators selected by the Executive Board of the Missouri Baptist Convention. It is governed by a board of 12 trustees. The Foundation staff includes staffing for fund management, stewardship, planned giving, trust administration and legal matters, in addition to its President. As of March 31, 2003 , the Foundation manages over $109,500,000 in endowment and long-term funds for ministries of Missouri Baptists and such other qualified charitable trusts or entities, which may or may not be affiliated with a Baptist Convention, the funds of which the Board of Trustees of the Missouri Baptist Foundation determines it will receive and administer.
What is the purpose of the Missouri Baptist Foundation?
The mission of the Missouri Baptist Foundation is to strengthen the mission and ministry efforts of Missouri Baptists.
The purpose of the Missouri Baptist Foundation is to develop, manage, and distribute financial resources for the benefit of Missouri Baptists’ mission and ministry efforts within Missouri , other states, and around the world.
The priorities of the Missouri Baptist Foundation are to promote Christian stewardship, assist with the planning and implementation of charitable gift arrangements and manage assets entrusted to the Foundation to provide perpetual support for the mission and ministry efforts of Missouri Baptists.
The Foundation encourages faithful stewardship by:
- Managing funds entrusted to it in an effective and socially responsible manner,
- Educating people in appropriate Christian estate stewardship and financial management techniques,
- Providing trustee services to facilitate good financial management,
- Encouraging individuals to be good Christian stewards,
- Educating individuals about tax effective means of contributing to Baptist causes while maintaining an income stream for themselves or their family or friends,
- Striving for excellence and continuous improvement in its operation,
- Operating with the highest Christian moral and ethical standards, as exemplified by its membership in the Evangelical Council for Financial Accountability.
In the fulfillment of this mission the Foundation seeks to serve the Missouri Baptist institutions by offering investment opportunities that are socially screened and diversified in ways that an investor may not otherwise be able to achieve. The Foundation also seeks to build endowments for future Baptist ministries at state, national and worldwide levels through development and planned giving services.
Who can invest with the Missouri Baptist Foundation?
The Foundation manages funds for any investor who is recognized as exempt from federal income tax under §501 (c) (3) of the Internal Revenue Code of 1986, as amended, and falls into one, or more, of the following categories of Eligible Participants : (i) Baptist institutions, agencies, commissions, foundations, associations and churches; or (ii) a trust with either its total remainder or its income for a predetermined period designated for charitable organizations in accordance with IRS guidelines and at least one-half the distribution designated to be made to a Baptist institution, agency, commission, association or church; or (iii) such other qualified charitable trust or entity, which may or may not be affiliated with Baptist Conventions, the funds of which the Board of Trustees of the Missouri Baptist Foundation determines it will receive and administer. None of the funds invested with the Foundation may be held for retirement plans.
What are the risks?
Investing in the securities markets, whether domestic or international, involves risk of possible loss of principal and/or income. Even though the Foundation believes long-term investment of these Funds will result in positive rates of return there is no guarantee of such written or implied. Past performance is no guarantee of future performance.
Note: The value of portfolios and Funds will fluctuate. An investing organization should consult its own advisors regarding risks, rewards and other aspects of investing in any Fund made available through the Foundation.
What are the investment options with the Missouri Baptist Foundation?
Missouri Baptist Foundation offers a total of five common investment funds (the “Funds”); each managed by one or more professional investment managers. For investors requiring exposure to specific sectors of the market, where appropriate, the Foundation may offer access to specialized portfolios that constitute its broadly diversified MBF Stock Fund described below. The following is a summary of the various options available to Participants with the Missouri Baptist Foundation.
MBF Cash Fund
The MBF Cash Fund’s objective is liquidity and a reasonable rate of return. This Fund is designed for short-term investment of funds when the timing of the investor’s liquidity needs is uncertain or variable. The asset total of the MBF Cash Fund as of March 31, 2003 , is approximately $3,500,000.
MBF Bond Fund
The MBF Bond Fund’s objective is current income and preservation of nominal capital. No provision is made for protection against inflation. This Fund is actively managed externally by an Investment Manager. The Fund is primarily invested in government and corporate bonds, commercial paper, mortgage backed securities, and collateralized mortgage securities. The Fund is designed for investors whose main objective is current income. The fund seeks to track the Lehman Bros. Government/Credit Intermediate Bond Index. The asset total of the MBF Bond Fund as of March 31, 2003 , is approximately $30,100,000.
MBF Income Fund
The MBF Income Fund’s objective is current income and preservation of nominal capital. No provision is made for protection against inflation. The Fund is managed internally with a “buy and hold” strategy. The Fund is primarily invested in government and corporate bonds, commercial paper, mortgage backed securities, and collateralized mortgage securities. The Fund is designed for investors whose main objective is current income paid out on a regular basis. The Fund seeks to track the Lehman Bros. Government/Credit Intermediate Bond Index. The asset total of the MBF Income Fund as of March 31, 2003 , is approximately $6,900,000.
MBF Balanced Fund
The objective of the MBF Balanced Fund is to provide a reasonable level of current income and simultaneously to protect the purchasing power of the principal against inflation. Approximately 35% of the Fund is invested in the MBF Bond Fund, 35% in the Domestic Large Cap Stock Portfolio, 15% in the Domestic Small-Mid Cap Stock Portfolio, and 15% in the International Stock Portfolio. This fund is designed for those investors who are seeking a single fund to provide broad diversification, reasonable current income, and protection against inflation. The asset total of the MBF Balanced Fund as of March 31, 2003 , is approximately $83,700,000 (35% in the MBF Bond Fund, 65% in the MBF Stock Fund).
MBF Stock Fund
The primary objective of the MBF Stock Fund is growth of principal. Current income is low and of secondary importance. The Fund is invested approximately 54% in domestic large capitalization stocks (equally in value, growth and core), 23% in domestic small-mid capitalization stocks (both value and growth), and 23% in international stocks. Each of these three specialized portfolios will also be available in the future to participants separately (see discussion and description below). The asset total of the MBF Stock Fund as of March 31, 2003 , is approximately $53,500,000.
The MBF Stock Fund is comprised of the following stock portfolios:
Domestic Large Cap Core Stock Portfolio
The Domestic Large Cap Core Stock Portfolio’s objective is growth of capital, with modest current income. The portfolio is invested in large cap stocks and is passively managed. It seeks to replicate the performance of the Russell 1000 Index, but invests only in stocks that meet the Foundation’s socially screened investment requirements.
Domestic Large Cap Value Stock Portfolio
The Domestic Large Cap Value Stock Portfolio’s objective is growth of capital, with modest current income. The portfolio is invested in large cap value stocks. Its performance will be measured against the Russell 1000 Value Index, but invests only in stocks that meet the Foundation’s socially screened investment requirements.
Domestic Large Cap Growth Stock Portfolio
The Domestic Large Cap Growth Stock Portfolio’s objective is growth of capital, with modest current income. The portfolio is invested in large cap growth stocks. Its performance will be measured against the Russell 1000 Growth Index, but invests only in stocks that meet the Foundation’s socially screened investment requirements.
Domestic Small/Mid Cap Value Stock Portfolio
The Domestic Small/Mid Cap Value Stock Portfolio’s objective is long-term growth of capital. Its assets are invested in small to mid-cap value stocks. It carries substantially greater risk than the Domestic Large Cap Portfolio due to the small size of the companies in the portfolio. Its performance will be measured against the Russell Small/Mid Cap Value Index, but invests only in companies that meet the Foundation’s socially screened investment requirements. Investors in this portfolio should have a high tolerance for risk, a long-term investment horizon, and low liquidity requirements.
Domestic Small/Mid Cap Growth Stock Portfolio
The Domestic Small/Mid Cap Growth Stock Portfolio’s objective is long-term growth of capital. Its assets are invested in small to mid-cap growth stocks. It carries substantially greater risk than the Domestic Large Cap Portfolio due to the small size of the companies in the portfolio. Its performance will be measured against the Russell Small/Mid Cap Growth Index, but invests only in companies that meet the Foundation’s socially screened investment requirements. Investors in this portfolio should have a high tolerance for risk, a long-term investment horizon, and low liquidity requirements.
International Stock Portfolio
The Foundation’s International Stock Portfolio offers investment in non-U.S. stocks, primarily in large capitalization stocks. The portfolio may carry substantial risk over and above that of a domestic portfolio, most notably currency and political risks. The portfolio is designed for investors who already have a balanced, diversified core domestic portfolio in place, and are looking for additional diversification through socially screened international exposure. Its performance will be measured against the MSCI All Country World Free ex-U.S. index.
How does the Foundation select investments for social responsibility?
The Missouri Baptist Foundation, responding to the Biblical challenge of responsible stewardship, calls for conscious investment decisions consistent with Christian moral and ethical principles of Missouri Baptists. In accordance with Christian moral and ethical principles of Missouri Baptists, the investment objectives for the Funds must be pursued with consideration for the Christian moral and ethical implications of investing. The Foundation encourages investment in those corporations that promote the common good and avoids investment in companies whose principal business activities are inconsistent with Christian moral and ethical principles of Missouri Baptists.
Who is involved in Funds management for the Foundation?
The Missouri Baptist Foundation is governed by a Board of Trustees made up of twelve individuals elected from Missouri Baptist churches across the state. Trustees are elected for three-year terms. The Trustees meet four times each year and also act through a three-member executive committee when necessary. The Foundation has a standing staff committee on Investment Review and a standing Trustee committee on Endowment Management composed of members chosen for expertise, experience and inclusiveness. This Trustee Committee, together with the Foundation staff Investment Review Committee and the Foundation’s investment advisor, The Consulting Group of Salomon Smith Barney, reviews investment policy and evaluates the performance of the various investment managers.
The investment managers for each of the Foundation investment disciplines are currently as follows:
Approximate Portfolio Size
As of March 31, 2003
Bond :
Metropolitan West Asset Management (manager) ........................................... $ 30,184,000
Large Cap Domestic Stock Core:
Parametric Portfolio Associates (manager) ........................................... $ 8,562,000
Large Cap Domestic Stock Growth:
TCW Investment Management CO (manager) ........................................... $10,594,000
Large Cap Domestic Stock Value:
Lord, Abbett & CO (manager) ......................................... $9,913,000
Small Mid Cap Domestic Stock Growth :
Westfield Capital Management CO (manager) ............................................ $5,480,000
Small Mid Cap Domestic Stock Value :
J.L. Kaplan Associates, LLC (manager) ........................................... $ 3,809,000
Private Capital Management (manager) ........................................ $ 3,800,000
International Stock:
Brandes Investment Partners (manager) ............................................ $11,386,000
The Foundation reserves the right to change any or all investment managers at any time without notice to participants.
Custodial services for the Funds invested through the Foundation are provided by Salomon Smith Barney. Administration and reporting to investors is provided by the Missouri Baptist Foundation. Details regarding any of the foregoing can be obtained through the Foundation office.
What does it cost to invest with the Foundation?
Missouri Baptist Foundation seeks to keep the costs to its Participants as low as possible. The administrative overhead costs are shared proportionately among each of the accounts under management. Those costs are charged directly to and paid out of the assets of each respective Fund. The total current costs are explained in the Investment Custodial Agreement in greater detail. Information concerning such costs is also available upon request.
How does an organization invest with the Foundation?
Each organization wishing to invest in one or more of the Foundation Funds or portfolios described above must sign an Investment Custodial Agreement and complete a Participant Application. Once the signed Agreement, completed Application, and assets are received in the Foundation office, investments are made in the desired Fund(s) or portfolio(s). All investments made pursuant to the Agreement will be held in the name of the Foundation (or such other entity selected by the Foundation) as nominee for the Participant, with actual ownership of the investments remaining in the Participant. Each Participant is responsible for choosing one or more of the Funds and/or portfolios into which it wishes to direct its investment. Further, each investment manager utilized by the Foundation with respect to Participant assets is to be considered as acting for each Participant for whose benefit the investment manager has invested assets.
Each Participant will be assigned an interest (an “Ownership Interest”) in the assets of each chosen Fund or portfolio reflecting the pro rata interest of the Participant in the assets of the particular Fund or portfolio. The value of a Participant’s Ownership Interest may fluctuate as the value of the particular Fund or portfolio fluctuates. Purchases and withdrawals may be made in the form of check or wire transfer.
When may purchases or redemption occur?
The assets of the MBF Bond Fund, MBF Income Fund, MBF Stock Fund, and MBF Balanced Fund are valued on the last business day of each month and a net asset value of the Ownership Interests in the assets of each of the Funds is calculated.
Purchase or redemption of Ownership Interests in the assets of the MBF Cash Fund may be processed at any time upon written notice.
Ownership Interests in the assets of other Funds may be purchased or redeemed at net asset value at month end, provided that written notice has been received at the Foundation office at least thirty (30) calendar days before such month end. Any properly requested redemption checks for all Funds except the MBF Cash Fund are disbursed by the 15 th business day following each month end evaluation date.
In order to protect the assets of the Fund, timing of redemptions of $1,000,000 or more within a calendar month shall be negotiated with the Foundation as large redemptions may impact the Fund. Further information including current portfolio size, performance, fees, and updates of this information for participants, can be obtained from the Foundation office.
For further information you may email ccalmer@mbfn.org
Dated: March 31, 2003
Metropolitan West Asset Management
MBF Bond Fund (Intermediate)
The Firm
MWAM is 51% owned by Societe General and 49% by the fixed income portfolio management team. The company was founded and began managing fixed income accounts for clients in August 1996 by the co-directors of fixed income at Hotchkis and Wiley and other former members of the Hotchkis and Wiley fixed income team.
Investment Objective
The unique feature of MWAM’s fixed income style is our emphasis on using multiple value-added strategies in a measured and diversified manner. This approach has resulted in consistent out performance, and most notably, limited downside volatility over any period. MWAM’s investment style is also differentiated by its intensive search for value across all sectors of the bond market. This search is augmented by the use of proprietary quantitative models to identify bonds with the best risk/reward tradeoffs.
Investment Discipline
Metropolitan West Asset Management’s (MWAM) fixed income philosophy has been designed with the goal of consistently outperforming a client’s benchmark while maintaining below average volatility. They believe consistent out performance is gained through the measured application of five value-added strategies.
The five value-enhancing strategies employed by MWAM are:
1) Limited average maturity/duration shifts
2) Yield curve management
3) Utilization of all sectors of the bond market
4) Quantitative security selection
5) Sophisticated buy/sell execution strategies
Since managing interest rate risk is a cornerstone of their philosophy, they limit the maximum amount of duration discretion in a client portfolio to plus or minus one year around a client’s benchmark duration.
MWAM’s fixed income strategies are formulated by the team according to their long-term fundamental economic outlook. This outlook reflects the portfolio management team’s view on growth, inflation, Federal Reserve policy, and interest rates. This outlook is debated quarterly by the members of the fixed income team who review cyclical and secular developments in the economy and the financial markets. From this review, major themes are identified that they believe will be key in driving the economy and the Fed.
Additionally, they believe that the portfolio managers must thoroughly understand the client’s benchmark and investment guidelines in order to structure a portfolio for out performance. To this end, analytics are employed to compare the characteristics of the client’s portfolio with that of the benchmark.
MWAM places a heavy emphasis on scenario analysis and the application of quantitative valuation analytics to the security selection process. In general, their scenario analysis focuses on identifying those securities that will outperform over a wide range of interest rate, yield curve, and volatility scenarios. Sophisticated analytics are employed in order to determine expected returns along with “worst case” outcomes. Generally, a security should have compelling value in the most likely scenarios and an acceptable profile in a “worst case.”
MWAM adds value through the measured application of all five value-enhancing strategies. Over a complete market cycle, two strategies--sector and security selection--generally add the most incremental value to overall performance.
Parametric Portfolio Associates
Domestic Large Cap Core Stock Portfolio (Passive )
The Firm
Parametric Portfolio Associates, founded in 1987, is located in Seattle , Washington . The firm is an individual subsidiary of Allianz AG through Allianz’s acquisition of PIMCO Advisors L.P. The firm currently manages over $4 billion in assets.
Investment Objective
Parametric’s Large Cap Domestic Core Equity Index portfolio seeks to produce a total return that is similar to that of the Russell 1000 Index. The portfolio will be restricted from holding the stock of any company involved in alcohol, tobacco, gambling, pornography or abortion and fetal tissue research resulting from abortions. Because index replication is not possible due to these social restrictions, the portfolio may experience period-to-period return differences relative to the unconstrained Russell 1000 Index.
Investment Discipline
Parametric uses an index-tracking approach designed to produce a total return that is similar to that of the Russell 1000 Index. Parametric will use portfolio optimization to construct a portfolio that statistically resembles the Russell 1000 Index along numerous risk dimensions, such as size, yield and industry classification.
The goal of optimization is to minimize risk relative to the benchmark, the Russell 1000 Index. The sample large cap mandate includes a set of exclusionary screens, eliminating companies involved in alcohol, tobacco, gambling, pornography or abortion and fetal tissue research resulting from abortions. The elimination of these companies creates risk exposures relative to the unconstrained benchmark along many dimensions, like size and industry. Using a risk model and optimizer, Parametric aligns the portfolio to the benchmark along several fundamental characteristics as well as along industry lines, maintaining the lowest forecast tracking error possible while taking into account all restrictions and constraints.
Parametric monitors the portfolio daily for cash, corporate actions and index changes. Parametric keeps the portfolio fully invested and appropriately and sensibly re balances the portfolio when index changes or corporate actions occur.
TCW Investment Management Company
Domestic Large Cap Growth Stock Portfolio
The Firm
Founded in 1971, the TCW Group (TCW) is a group of affiliated global financial companies providing a broad range of international and U.S. equity and fixed income investment products and services for investors around the world. With a team of over 280 investment and administrative professionals located worldwide, TCW has a broad depth of knowledge, investment experience, and research capability. TCW Investment Management Company, a member of TCW, is an investment adviser registered with the Securities and Exchange Commission. With approximately $80 billion under management or committed to management, TCW is one of the largest privately-held investment companies in the United States .
For Salomon Smith Barney’s Fiduciary Services program, the TCW’s product name is Large Cap Growth.
Externally, however, TCW refers to its product as Concentrated Core Equity.
Investment Objective
TCW Investment Management Company’s (TCW) Large Cap Growth Stock strategy seeks to maximize capital appreciation over current yield. TCW’s investment philosophy stresses investment in high quality companies with opportunities for growth that are not fully reflected in stock market valuations. The goal of their Large Cap Growth Stock portfolios is to exceed the S&P 500 Index over a complete market cycle.
There is, of course, no assurance that this goal will be realized. Portfolio values will fluctuate as market conditions change.
Investment Discipline
TCW utilizes a “bottom-up” investment strategy that focuses primarily on assessing the operating prospects of each prospective holding. Companies targeted for investment typically are those believed to have strong and enduring business models and inherent advantages over their competitors. Companies are also selected for their prospects for capitalizing on broad investment and economic trends and based upon a top-down appraisal of the U.S. economy. TCW’s investment research capabilities drive this strategy and play a critical role in the investment process. Purchase candidates typically exhibit some or all of the following characteristics:
- Sustainable product or cost structure advantage
- Scaleable business opportunity that capitalizes on long-term trends
- Dominant market share or specialized market niches
- Strong earnings and cash flow to finance future growth internally
- Shareholder orientation--using cash flows to generate highest long-term return to shareholders
TCW applies a rigorous sell discipline to all portfolio holdings. All companies held in the portfolio are monitored and re-evaluated regularly to determine if they are fulfilling expectations. Specifically, a holding is sold when its price rises to a level that reflects the company’s growth opportunities or if it fails to meet the operational expectations.
TCW’s fully invested portfolios are built on a company-by-company basis and will hold approximately 25-40 positions. The portfolios may invest in foreign securities listed on established U.S. exchanges or traded in the over-the-counter U.S. market.
Lord, Abbett & Co.
Domestic Large Cap Value Stock Portfolio
The Firm
Founded in 1929, Lord, Abbett & Co. is an independent money management firm structured as a partnership. Lord Abbett is owned by 17 partners who are active in the management and operation of the firm. Located in Jersey City , Lord Abbett manages over $33 billion with a total staff of almost 400.
Investment Objective
Lord Abbett’s value-based, disciplined investment process employs both informed judgment and quantitative analysis in seeking to identify and invest in undervalued stocks. They seek to outperform the Russell 1000 Value Index over a full market cycle while assuming less risk.
There is, of course, no assurance that these goals will be realized. Portfolio values will fluctuate as market conditions change.
Investment Discipline
As a value manager, Lord Abbett believes that the market systematically mis-prices stocks and groups of stocks. Lord Abbett combines valuation measures and fundamental company and industry research to identify such value opportunities. They calculate where they believe the market would price these stocks at fair value. Lord Abbett constructs portfolios of issues where they believe the gap between market value and fair value can be closed over a reasonable period of time. This process is implemented within the context of anticipated changes in the economy which will have a future impact on asset valuations and earnings expectations.
Lord Abbett’s three-step investment process begins with quantitative screening. A universe of about 1000 stocks is analyzed using a proprietary, multi-factor model developed to provide objective measures of relative value. Stocks ranking in the top 40% of the universe according to the relative valuation measures are candidates for further research.
In the second step of the process, the remaining 400 stocks undergo thorough fundamental research by a team of eight research analysts. Their goal is to identify those stocks that will produce superior investment returns over the next twelve to eighteen months. Primary consideration is given to each company’s strategic plans to build shareholder value and the resources available, both managerial and financial, to implement these plans. Company visits are emphasized.
In the third step of the process, Lord Abbett develops an economic outlook for the next twelve months through its business cycle analysis. Factors considered include: the level and direction of inflation, interest rates and general economic activity; government monetary and fiscal policies; trends in profitability of economic sectors; and the supply/demand balance for financial assets. This economic forecast is combined with results of the valuation/fundamental analysis to produce a “buy list” of 150 stocks. From this list, Lord Abbett builds portfolios of about 60 stocks whose earnings, cash flows and asset values they believe will benefit most from the forecasted economic trends. Portfolios will normally be kept close to fully invested in stocks.
A stock may be sold due to: diminishing valuation ranking, deteriorating fundamental outlook, and/or a change in economic sector emphasis. A sale is usually mandatory when there is a major change in valuation of the stock from lower deciles to higher deciles, since this typically reflects a positive outcome from the position.
Westfield Capital Management Company LLC
Small/Mid Cap Growth Equity Product
The Firm
Westfield Capital Management is headquartered in Boston , Massachusetts . A wholly owned subsidiary of Boston Private Financial Holdings (BPFH), Westfield is registered with the Securities Exchange Commission as an investment adviser. As of August 31, 2003 , Westfield had approximately $4.9 billion in assets under management .
Investment Objective
The goal of the Small/Mid Cap Growth portfolios is to exceed the Russell 2500 Growth Index over a complete market cycle. There is, of course, no assurance that this goal will be realized. The securities of small capitalization companies generally have more price volatility than larger, more established companies. Portfolio values will fluctuate as market conditions change.
Investment Discipline
Westfield Capital Management favors investing in earnings growth stocks given our conviction that stock prices ultimately follow earnings progress and that they offer the best opportunity for superior real rates of return. Reasonably priced stocks of companies with high foreseen earnings potential are best identified through in-depth, fundamental research. It is our belief that the small to mid cap portion of the market is under-researched, and therefore less efficient. Westfield ’s research efforts enable us to uncover and exploit these inefficiencies. The firm’s experience, extensive research, and first-hand knowledge of company operations derived through on-site visits and meetings with management provide its competitive edge.
Westfield is a research centric organization. The vast majority of each member of the Investment Committee’s time is spent on company level research. The portfolio management function is primarily carried out on a product level, with the investment committee making portfolio decisions on a consensus basis. This allows even our most senior personnel to remain active in the role of research analyst.
Security Selection Process
Westfield utilizes fundamental, bottom-up research to drive the investment process. Research is covered vertically by industry across the firm’s five portfolio manager/analysts and three analysts. Each of these professionals follows two or three industries using a broad information network that includes company managements, suppliers, users, competitors and Wall Street sources to identify and evaluate companies capable of providing consistently high or accelerating earnings growth.
Prospective investments are evaluated on a stock-by-stock basis in terms of earnings power and growth, quality, value and relative price. Visits with company managements are an integral part of the research process and allow us to evaluate the management’s long-term strategy and ability to execute that strategy, the nature and composition of revenues, and the company’s operational leverage, both internal and external. Forecasts relating to future earnings growth and price objectives are generated internally.
Stock recommendations may be introduced to the Investment Committee by any one of Westfield ’s analysts or managers. Once ideas are generated, purchase recommendations are reviewed in detail before being approved for use. Recommendations include a concise case for investment, a forward earnings growth forecast, and a 12-month price target. Approved issues are required to meet a 12-month, 25%+ total return objective.
If approved by the Investment Committee, the recommended security is purchased across all appropriate portfolios. Small/mid cap portfolios consist of 45-55 names within a market cap range of $300 million to under $6 billion at cost, and in which Westfield can establish or liquidate a position within a few days.
Private Capital Management, L. P.
Domestic Small/Mid Value Stock Portfolio
The Firm
Private Capital Management, L.P. (“PCM”) is headquartered in Naples , Collier County , Florida . PCM is registered with the Securities Exchange Commission as an investment adviser. As of March 31, 2001 , PCM had over 1,100 accounts and approximately $7 billion in assets under management.
Investment Objective
The goal of the small/mid capitalization value portfolios is to exceed the Russell 2500 Value Index over a complete market cycle. There is, of course, no assurance that this goal will be realized. The securities of small capitalization companies generally have more price volatility than larger, more established companies. Portfolio values will fluctuate as market conditions change.
Investment Discipline
The philosophy of PCM is to view a security investment as a direct, proprietary ownership interest in the underlying business. Therefore, PCM usually holds a position for years, resulting in a reduction of trading expenses. The mind set is tantamount to that of an entrepreneur conducting due-diligence on a potential acquisition; there is a determination to understand that the assets and liabilities are fairly stated, that the income statement accurately represents the current results of operations, that management is of high quality and concerned about creating value for the owners, that there are opportunities to grow and the capital resources to finance this growth, and that ultimately the business generates sufficient discretionary cash flow and acceptable cash-on-cash return investment. Management quality, compensation, shareholder orientation and other related corporate governance issues, can and in our experience often do disproportionately impact the value created for investors in small-capitalization situations. For example, the net present value of management compensation, perquisites and discretionary spending, can be a significant off-balance sheet liability, and may offset a material proportion of the company’s private market value.
Security Selection Process
Identification of businesses with economic and financial characteristics, which in their judgment are highly favorable. Such businesses often generate substantial free cash flows, have superior capital structures, and are capable of internally financing growth. The fundamental process for investment in an equity security includes:
Evaluation of management. While the estimation of management’s competence, integrity and concern for shareholder value is a difficult and subjective process, insight can be gleaned from operating styles, spending practices, compensation policies, and the quality and activity levels of the boards of directors.
Strict attention to valuation. Corporate excellence does not necessarily equate to stock market excellence if the investor overpays for the privilege of participation. PCM believes that value investing requires strict measurement of the quality received versus the price paid and, by definition, involves purchasing corporate assets, through the stock market, at a discount to private market value.
Investing as an entrepreneur. Specific areas of hands-on business expertise include financial services, media, computer technology, manufacturing, retailing, healthcare, agriculture, and real estate. Within this context, potential portfolio companies will be evaluated on an “acquisition basis.” The merit of an investment will be determined as though the acquisition of the entire company was contemplated, and the valuation and due-diligence results must support the transaction at the existing market valuation.
J, .L. Kaplan Associates L.L.C.
Domestic Small/Mid Value Stock Portfolio
The Firm
J.L. Kaplan Associates, LLC was founded in 1976 by James Kaplan. Initially a proprietorship, the firm converted to a limited liability company in December, 1997. The firm originally served only wealthy individual investors and focused on quantitative hedging techniques. In 1980, the firm adopted its current value-oriented equity philosophy and began taking tax-exempt institutional assets. During 1986, Paul Weisman, who had previously been a small-cap equity analyst at Delphi Management, joined the firm. In January 1998, Regina Wiedenski was added to the professional staff. Ms. Wiedenski was previously a securities analyst at Advest and Adams, Harkness & Hill, and before that a financial analyst at Morgan Stanley.
Recently JLK re-capitalized the company and sold a controlling interest in the firm to Evergreen Investments, the asset management division of Wachovia Corp, effective Nov. 1, 2002 . Paul Weisman and Regina Wiedenski, were given an interest in the re-capitalized limited liability company. Jim Kaplan will continue to retain a significant participation in the growth of the business for at least the next five years. J.L. Kaplan Associates will continue to operate from the same location with exactly the same analysts and staff as before. There will be no modifications of our investment process.
Investment Objective
The JLK approach is value investing with a concentration on small and mid-capitalization equities. The benchmark is the Russell 2500. JLK makes no attempt to manage to the benchmark by over-weighting or under-weighting specifics.
Investment Discipline
The investment philosophy is to purchase stocks in the same way that a knowledgeable buyer would evaluate a business for acquisition in its entirety. The business should be simple to understand, have favorable long-term prospects, be managed by competent individuals with shareholder orientation and sell at a wide discount from its intrinsic value. JLK places particular importance on issues of management integrity, such as utilizing conservative accounting principles and aligning management’s interests with those of shareholders. The philosophy is to buy undervalued equities meeting the following criteria:
1) stock has a low price-earnings ratio (specifically has a P/E on normalized earnings less than the inverse of the long-term AA corporate bond rate);
2) company has a sustainable return on equity of 15% or greater;
3) company generates positive free cash flow;
4) company has a low debt to equity ratio relative to industry peers;
5) stock is at a substantial discount to private market value;
6) revenue and earnings grow in excess of inflation;
7) has management with both integrity and a good business strategy.
Sell Criteria
JLK will sell any stock which has a price earnings ratio which is 150% of the ratio at which they would buy the same stock. This may occur because the stock rises faster than the underlying earnings or because the earnings fundamentals deteriorate. Portfolio managers monitor the list daily to see if any stocks hit their sell price. They also sell any stock which hits 85% of their estimate of private market value.
Brandes Investment Partners, L.P.
International Stock Portfolio
The Firm
Brandes Investment Partners, L.P. (BIP) is a registered Investment Adviser founded in 1974, with headquarters in San Diego , California . The firm manages over $45.2 billion and has a staff of approximately 371. The firm, and substantially all investment personnel, are based in San Diego . Brandes has a wholly owned subsidiary in Geneva , Switzerland . The firm is a 95.5% beneficially owned by senior investment professionals of the firm and is currently managed by a committee of five Managing Partners.
Investment Objective
BIP seeks to outperform MSCI All Country World Free ex-US index over a full market cycle while maintaining below benchmark risk. Their goal is to purchase the best international value opportunities without bias to countries and industries. They attempt to invest in stocks of businesses which have determinable value, but which are unpopular or overlooked at the moment—“undervalue” stocks. By focusing on the fundamental characteristics of a company, an estimate is developed of its intrinsic value. Country and industry exposure are a residual of their bottom-up stock selection. They do not deviate from this philosophy in the application of their investment process. There is, of course, no assurance that these goals will be realized. Portfolio values will fluctuate as market conditions change.
Investment Discipline
BIP utilizes exclusively a bottom-up, Graham and Dodd value-oriented investment philosophy. Most importantly, a large enough price-to-value discrepancy must exist to provide, in BIP’s opinion, a margin of safety and opportunity for appreciation. In addition, the securities generally must have a strong balance sheet and strong cash flow. Ideas developed by portfolio managers and analysts are screened to find stocks with low price/cash flow, low price/earnings, low enterprise value ratios and low debt/equity ratios.
These preliminary steps identify companies, from both developed and emerging markets, for more intensive research. Once candidates are identified, analysts responsible for industry and regions exhaustively review all available information, with a primary emphasis on analysis of financial statements.
All investment decisions, including which securities will be on the buy list, are the responsibility of the product investment committees and the Investment Oversight Committee (IOC). The IOC is comprised of Managing Partners and senior investment professionals. The three product investment committees are comprised of product coordinators, portfolio managers, and analysts. Each investment committee has a specific focus: developed markets and large capitalization portfolios, small capitalization portfolios, and emerging markets portfolios. Each product committee has five or more senior investment professionals who are voting members. The IOC establishes broad standards and practices to be followed by the three separate product investment committee. In addition, the IOC reviews market trends and evolving analytical issues for consideration and application by the product investment committee. The product investment committees meet weekly, while the Investment Oversight Committee meets quarterly. Account structure is determined by the product investment committee, which provides a very narrowly focused buy/sell list. Portfolio weightings with respect to countries, sectors, industries, and currencies are a by-product of the bottom-up stock selection process, not a top-down allocation based on a macroeconomic outlook or strategy. However, to control risk, constraints are imposed on portfolios. Typically, no more than 20% of a portfolio or 1.5 times the relevant benchmark is invested in any one country or industry, no more than 5% (at cost) invested in any one security and no more than 20% (at cost) invested in emerging markets. A portfolio will normally be allocated among 40 to 75 issues. Equities are normally held for 3 to 5 years to realize full appreciation potential. As a result, portfolio turnover is low and usually ranges between 25% and 35%. Equities are sold once they are believed to have reached full value, with sell points set by the Product Investment Committee before the stock is brought and reviewed on an on-going basis. A stock will also be sold if the fundamentals deteriorate, a better prospect appears, or the stock becomes over-weighted due to appreciation based on the committee’s estimate of the stock’s fundamental value.
