Mr. Edwards: About once a month we review all sectors of the economy. Our portfolios tend to stay pretty much about 25% health care, 25% technology, 25% financial services, although the weightings of the industry groups within those sectors tend to change. And then about 25% of our stocks are in what we call 'slow but steady' categories, which also are known as value stocks.
TWST: Financial services, health care and technology certainly have
rewarded investors over the last several years. How did you determine to
keep 75% of the portfolio in those sectors?
Mr. Edwards: We manage money for private clients. And any one of those
clients can go out tomorrow and buy Vanguard Index 500 mutual fund. So
our philosophy is that either we have to do better than Vanguard 500 or
at least do better on a risk-adjusted basis. Our thought process is to
select within the S&P 500 which of the major sectors will grow faster
than the overall S&P 500 and concentrate our research there. As it
turned out, financial services, technology, and health care were our
choices early on and have been the top performing sectors of the last
decade. It was a bad time in the early 1990s for financial services, but
we moved into that sector in 1994 and so far we've been on target with
our picks. More generally what we have found, and we have done some very
interesting studies on this, is that the volatility of these high
performing sectors tends to cancel each other. For example, when
technology is hot and financial services are not, our portfolios end up
with 80% of the maximum returns, but with 60% of the volatility. So
when we review our portfolios over the last five and a- half years
since the inception of this firm, we see that our balanced accounts,
which are about 75% U.S. equities, 20% corporate bonds, and 5% cash,
have gained 214%, versus 218% in the S&P 500. If we look at the accounts
that are 100% stocks, they're up 280%. So our stock picking net of
commissions and fees are beating the S&P by about 1% a quarter.
Tickers included in this excerpt: CMGI, COMS, CSCO, CYT, DGX, DSPG, MTG, SRV
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