At Baldwin, we believe that a comprehensive stock selection process, employing quantitative, qualitative and technical methodologies, creates superior investment performance over the long term.
Recognizing that an appropriate asset allocation plan significantly influences investment performance, we initially meet with our clients to understand their risk sensitivity, as well as their current and future goals and circumstances. We then structure an asset allocation plan that fulfills our clients’ needs and desires. While cash and high-quality bonds are included in most asset allocation strategies, we believe that stocks will outperform fixed income investments over the long run.
Our stock selection process combines the best of three methodologies: our proprietary quantitative stock selection model, our qualitative stock research database, and our technical chart guidance.
Baldwin’s proprietary quantitative stock selection model identifies global companies with high return on equity and return on investment, that exhibit superior price and earnings growth patterns, with a lesser but significant focus on price-to-earnings, price-to-cash flow, and price-to-sales attributes. We begin with a universe of over 1500 stocks, applying our formula to each in order to assign decile rankings. The stocks favored in the rankings have performed extremely well to date.
From the stock universe, we select and maintain the Baldwin Working List which includes approximately 150 stocks. Consistently high rankings and appropriate sector representation are two key criteria in the compilation and maintenance of the Baldwin Working List. Our portfolio managers meet weekly to discuss the relative growth potential of each stock sector. Larger stock positions or a greater number of stocks are purchased within sectors with strong growth prospects, while smaller positions or fewer stocks are chosen within less favored sectors.
In addition, we maintain a comprehensive stock research database. Each portfolio manager focuses on one or more equity sectors, such as Technology or Health Care, taking responsibility for understanding the companies and their stories. Their qualitative opinions, culled from a wide diversity of Wall Street and independent sources, are regularly added to the stock research database and support Working and Select list decisions.
Our technical approach consists of reviewing a variety of technical price charts for companies within our stock universe. These charts may serve as early warning indicators for companies poised to out- or under- perform the market. We also recognize that these images can assist us in our timing of stock purchases and sales and further enhance investment performance.
At Chester County Asset Management (CCAM), the focus is on fundamental industry research, company balance sheets, cash flow analysis, income statements and dividend payment histories. CCAM believes that a selective list of higher than average dividend paying securities offer competitive performance in strong market environments and provides significant portfolio protection in weak markets, because a significant portion of a stock’s total return over time comes in the form of dividends. Stocks which have had a setback in the market due to a surprise to the investment community can become candidates for inclusion in the client portfolios. The decline can create “value” in a cheaper than previous stock price. Fundamental analysis then determines if the causes for the stock’s decline are temporary or permanent. If CCAM analysts judge that the reason for the slippage is temporary, then additional work is done on a balance sheet, income statements and cash flow analysis to more thoroughly understand the corporation and its business. Importantly, CCAM endeavors to develop an in-depth grasp of management’s philosophy regarding dividend payments to stockholders – the owners of the company. If management has an established policy of consistently sharing corporate financial success with its shareholders and is committed to such, those shares may be added to well-diversified portfolios with an emphasis on overall quality.
Mutual Fund Selection
Mutual funds and Exchange Traded funds are selected for and recommended to clients from our Recommended Fund List. Our List contains what we believe are the best possible funds for our clients.
RKM has an investment committee, separate and apart from that of Baldwin Investment Management, that meets on a regular basis to review our Recommended Fund List, evaluating possible additions or deletions or HOLDS (no new money to be invested).
We divide the investment universe into four categories, and several sub-categories. Specifically, we have recommendations for these broad categories: INCOME FUNDS, US STOCK FUNDS, GLOBAL/ INTERNATIONAL FUNDS, AND REAL ESTATE/ENERGY/ALTERNATIVE/SPECIAL SITUATION FUNDS. Within each category, we maintain a list of at least six approved and recommended funds, but we often have as many as ten funds in some categories, especially in those for which we define sub-categories within the category. For example, we may have a US LARGE CAP GROWTH fund, or a SMALL CAP VALUE fund within the US STOCK FUND category, or a EUROPE SMALL CAP FUND, or ASIAN GROWTH fund within the GLOBAL category.
In striving to recommend the best possible fund choice for specific categories and sub-categories, we evaluate the fund’s performance relative to peers, stability and consistency of management. We also evaluate fees charged and ratings from organizations such as Morningstar and Charles Schwab. Our list includes both mutual funds and exchange traded funds, with many recent additions being very low cost ETF’s.
Funds are deleted from the list if they have underperformed relative to their benchmarks or against their peers, or if a management change makes us wary of how that might affect future performance. Sometimes a rating change by Morningstar or Schwab might prompt a review of a specific recommended fund, but the rating change by itself will not automatically prompt a deletion. Funds are sometimes placed on HOLD as a form of “probation” where the fund will be monitored between investment committee meetings for possible unfavorable or favorable action.
Once a fund is removed from our Recommended Fund List, we contact clients, and suggest its sale. This is done either in the regular course of a quarterly review, or if a client is not scheduled for a review and owns the fund, in a special note to the client with a replacement recommendation from our list.
We often recommend to our clients that a portion of their assets be invested in fixed income assets or bonds. Bonds reduce a portfolio’s excess movements up and down (volatility) and generate interest payments to satisfy a client’s income requirements.
Baldwin’s fixed income philosophy is rather straightforward. We do not attempt to predict interest rate movements.
Instead, we predominantly purchase and maintain a high quality portfolio of short to medium duration bonds.
Taxable (government, agency and corporate) and tax-exempt (municipal) bonds are considered, depending upon a client’s tax status and overall market conditions.
In many of our fixed income portfolios, bonds mature every year. Replacement bonds may be purchased with a maturity date beyond the longest existing in the portfolio. The technique is known as laddering maturities. Laddering maturities insures that a client’s holdings will better track the long-term direction of interest rates. Alternately, the proceeds from the bonds maturing annually could be invested in different assets or used for other purposes, depending upon client circumstances.
In sum, at Baldwin we are adept at structuring and managing conservative fixed income portfolios.
The international investment philosophy at Baldwin Investment Management, LLC has a growth bias and thus generally seeks out companies located in countries whose economies are performing more robustly as measured against all non-US economies. For some time this has meant having quite a large “emerging” markets content in the portfolio, as it is these economies that are expanding rapidly. These countries include China, Mexico, India, Brazil, Taiwan and others.
For many reasons, including economic, business and social structures, countries in the so called “developed” markets like Great Britain, France, and Germany have not experienced the growth exhibited by emerging market companies. Only recently have some of these developed markets become less fettered by burdensome regulation – recognizing that in order to compete successfully internationally with companies in the United States of America (and emerging countries), the rules had to be changed.
The strategy Baldwin follows has a top down perspective – i.e. first, find fast growing economies and then buy the biggest and most liquid stocks in those economies, anticipating that as the economy continues to blossom so will the companies and their stocks will increase in value. We do not invest in secondary issues in emerging markets, believing that there is too much risk associated with those names. Rather, we want to be involved in companies which are the best researched and most liquid names in a particular market, already recognizing that the market has some degree of illiquidity.
We want to invest in select companies before substantial institutional money (i.e. pension funds) focus on a market or a name and let those funds drive up the prices of our ideas.
Currency does not weigh heavily in our decision making process. One of the benefits of international investing is to diversify from dollar investments to hedge against its movement. In certain situations like in Hong Kong, there is no currency risk as their currency is pegged to the U.S. dollar. This circumstance is unusual, as most currencies in the world float today.
Country and company research is fundamental and technical. We depend upon reports from investment research houses like Morgan Stanley, Cazenove, Smith Barney, Merrill Lynch and UBS. After we have set our sights on a particular country, a fundamental “bottom-up” analysis unearths focus companies.
Stocks are sold if either the country or company supporting the analysis changes for the worse. Turnover in the portfolio is relatively low (approximately 25% per year) as the portfolio is managed in a tax sensitive fashion.
Baldwin Investment Management also participates annually in numerous private deals in order to provide clients with portfolio diversification, non-correlation with public market risks and income. Examples are as follows:
Income Producing Properties
BioTech/Medical Lab Space
Further to Baldwin’s efforts to provide clients with investment opportunities which diversify holdings away from public marketplace risk, Baldwin periodically invests client monies in venture capital deals. Focusing on medical technology, Baldwin has had experience in devices for congestive heart failure, drugs for immuno-oncology and tests for orthopedic infection and genetic mapping for pharmaceutical efficacy.