Investment Philosophy

Equity Philosophy

Our strategy in investing the equity portion of client portfolios is that of a fundamental growth stock investor. We take the approach of a business owner, seeking to make investments that we will own for many years. Although our primary focus is on a company's ability to grow sales and earnings, we differentiate our style with a few key principles:

Cash Flow Emphasis

We look for companies with strong balance sheets and significant cash flow generation. Most of the companies that we invest in generate cash flow that exceeds what is needed to operate and grow the business and maintain debt levels that are modest relative to the level of free cash generation. This allows management to deploy excess capital to actions such as dividends, stock buybacks, debt repayment, and strategic acquisitions.

Quality Distinction

We also like to define the companies we invest in as “quality” companies. While many of the income and balance-sheet criteria described above can lead to quantitative measures of “quality,” we believe that measures such as consistency, predictability, and sustainability of results are just as important when making investment decisions. Companies we choose to invest in often occupy a leadership role in a unique market or industry niche.

Diversification

Our equity holdings are comprised of core growth stocks, as well as smaller emerging growth companies. Core growth stocks are typically large-cap names. Many of these companies have been owned by our clients for many years and, in some cases, decades. Smaller names are typically faster growing, but more volatile. In addition to our traditional growth stocks, we will often invest in other securities such as Real-Estate-Investment-Trusts (REITS) and preferred stocks as “Income” vehicles for client portfolios. This has been especially useful in recent years, given the low level of yields available in the bond market.

Exchange-traded funds (ETFs) are utilized in client portfolios to gain exposure, at a very low cost, to asset classes for which diversification is more difficult with individual securities.

Our goal in using these types of instruments is to ensure that our clients are able to benefit from diversification and rate of return characteristics achieved by owning multiple asset classes.

Fixed Income Philosophy

It is our belief that the fixed income portion of a well-diversified portfolio provides a stable anchor to the growth provided by equity exposure. For this reason, we mainly focus on investment grade bonds. When we believe the risk/reward profile is favorable, we will opportunistically purchase high yield securities or ETFs that participate in the high yield securities market.

Credit Quality

As stability is a key objective of the fixed income portion of a portfolio, we normally focus on investment grade rated bonds since bonds rated below investment grade tend to be more volatile and highly correlated to equities. We will use high yield securities (mutual funds or ETFs, or preferred stock issues) when we believe the risk/reward profile is favorable, but they will be a much smaller percentage of the portfolio than the investment grade portion.

As the credit markets have evolved over the years, the BBB rating category has come to represent a much higher percentage of the bond market than it did even just a few years ago. As a result, we tend to emulate the broader market and include a greater representation of BBB securities in client portfolios. In retrospect, the financial crisis of 2008 has shown us that the rating category of investment grade securities was less important than the issuer industry in terms of risk, as even highly rated financial services bonds experienced large market decreases.

Issuers

Graybill invests in corporate bonds, preferred stock, municipal bonds, U.S. Treasuries, including Treasury Inflation Protected Securities and U.S. sponsored entities and agencies. Among these, our focus is on corporate bonds due to more attractive yields. We seek out corporations in more steady, predictable industries, and oftentimes smaller issue sizes. Many large market participants in the bond markets (pension funds and mutual funds) tend to avoid the smaller size issues because they cannot buy them in sufficient size to impact their portfolios. As a result, our clients will find a number of small and mid-cap issuers in their portfolios. We find that the yields on the smaller issues will be more attractive than the similar rated larger issues. While we strive to include these smaller issues, for diversification purposes, we do invest in large issue corporate bonds as well.

Duration

Duration is a measure of interest rate risk of an individual bond or bond portfolio. We can control the interest rate risk of an income portfolio by constructing a ladder of bonds maturing in different years and emphasizing maturities of specific years, longer or shorter. Our typical investment in an income security will have a maturity of two to eight years, depending on interest rate expectations and the shape of the yield curve. Another risk involved in income security investing is reinvestment risk, which is the uncertainty of available interest rates prevailing at the time of maturity of a security. The employment of a ladder of securities, with maturities in different years, reduces the reinvestment risk of a portfolio of income securities.

Individual Securities

In constructing income portfolios, we favor investing in individual securities rather than bond funds. By doing so, the investment return and future maturity value of each security is known at the time of purchase (if the security is held to maturity), although the market value may drift as it seasons and approaches maturity. In a bond fund, however, there is no maturity date, and the investor buys and sells at a market price of the whole portfolio (the "net asset value"). Thus, the investor does not know the value at any future date. As a result, the investor is more exposed to the uncertainty of interest rate risk with a bond fund.

HOW OUR PHILOSOPHIES WORK