The portfolios I construct are typically global; therefore country and international market risks play a part in selection.
Another factor I look at is market share. I do not invest in venture capital or emerging companies for clients, so potential investments need to be listed and traded on some major exchange and be within the top four or five in market share. Some companies may have a unique market position because of a process or patent. This risk must also be evaluated.
Companies I recommend also must have good financials-rising earnings estimates, positive cash flow, good corporate citizenship, good technicals, etc.
Sometimes more digging and discussion are needed to determine whether an investment is truly a good fit for a client. For example, we might learn that a pharmaceutical firm that looked attractive uses some form of animal testing, and I might need to re-consult with the client to determine if the investment will be acceptable. The task does get easier as you develop more portfolios because you can build from a pre-approved list you have already developed with other clients. For example, currently I have six different water resource companies that I can include in a portfolio depending on current market prices.
I tend not to use index funds or mutual funds for my clients' portfolios. Index funds by definition include a wide range of companies, some of which may have only a minor role within the particular industry but have large market capitalization. Mutual funds, in general, have their own purchase and sale criteria and this may or may not match the client's desires and personal screens.
In terms of portfolio management, a strong sell discipline is just as important as the selection criteria. Because of the risks inherent in smaller companies and foreign investing, keeping client portfolios limited to 30 to 40 positions allows for vigilance and better monitoring of positions. Positions are liquidated at a predetermined stop-loss point if necessary. When possible, profits may also be taken to bring the portfolio back into balance.
I currently perform complete sector reviews on a quarterly basis and look at many factors, including what defines the sector, and who are the major players and are they investable?
Reviews with clients of their portfolios occur up to a dozen times a year, depending on a particular client's needs and circumstances. Usually I will do a general market review, a portfolio review, and an in-depth review of one sector. Clients with green portfolios, we have found, really are traditional capitalists in that they care about what they own and what the company does. They really do want to do good by doing well.
Jesse Walden is a senior financial advisor with Merrill Lynch Global Wealth Management in Oakland, Calif. He can be reached at [email protected].