Equity Strategies

Equity Strategy
Research Methodology & Process

Our overall research methodology is built on a time-tested, three stage process. This process is top-down driven and has a strong emphasis on identifying quality, based on peer-to-peer analysis in each industry and sector. Importantly, we leverage this research process across all of our equity portfolio strategies.

Stage 1

QUALITATIVE ANALYSIS

We define quality as the sustainable competitive advantage a company enjoys over its competition. We have a checklist to assess competitive advantage including the following variables: product, price, service, management, cost position, market position, financial strength, strategic planning, technology, and execution. This is a dynamic process whereby different variables are given greater weight in some industries while given lesser weight in others. The key is to determine the critical driving forces in each industry in order to accurately assess the relative competitive advantages that each company may possess.

Stage 2

TOP-DOWN ANALYSIS

We identify long-term market drivers, or secular trends, which determine the sectors of the market likely to outperform and those likely to underperform the overall market. Based on this analysis we will position portfolios to hold a larger or smaller position in relation to the sector weights in the S&P 500. Actual sector weightings may vary across our different equity strategies reflecting the unique characteristics of each.

Stage 3

QUANTITATIVE ANALYSIS

We utilize industry specific valuation methodologies to determine the upside and downside potential for stocks that pass our qualitative screens. Typically this involves approximately 200 companies. Valuation parameters include: Price/Earnings (PE), Price/Cash Flow (PCF), Price to Growth (PEG), and Price/Book Value (PBV).

Portfolio Review & Sell Discipline

Our investment team is continually reexamining the holdings in all of our equity strategies in the context of our three-step investment process.

We continually challenge our qualitative assessment as the competitive landscape changes in response to the economy or other market forces. Likewise, we continually retest our overall top-down strategy through the various stages of the economic cycle. Lastly, through our quantitative valuation models we monitor the relative upside and downside of each individual stock in each strategy.

Our sell discipline flows from our three-step process as follows: First, if the company loses its quality – no longer has a sustainable competitive advantage vs. its competition it would be a candidate for sale. Second, a change in our top-down strategy may lead to increasing exposure in one sector and reducing exposure in another sector. Third, if a stock becomes over-valued based on our valuation analysis it may be a candidate for sale.

Core Equity Strategy

Our Core Equity Strategy is typically comprised of large-cap quality growth stocks but may also include small-cap, mid-cap, and international stocks. Our focus on high quality, industry leading companies results in a well-diversified portfolio of global corporations.

Core Equity
Top 10 Holdings

Financial Sector ETF

Facebook

Apple Inc.

Alphabet Inc.

Microsoft Corp..

Becton Dickinson Co.

Salesforce Com.

Blackrock Inc.

Schlumberger Limited

Celgene Corp.

 

“Weightings based on a representative account as of 6/30/2018 and subject to change. The specific securities identified and described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.”

In today’s global economy, strong companies must compete on a worldwide platform. As a result, we analyze investment trends and search for opportunities not only within the U.S., but also in international and emerging markets. Many of the holdings in our Core Equity Strategy generate more than 50% of sales outside of the United States. The balance of large cap, mid cap, small cap, international, and emerging markets provides solid diversification and growth opportunities for our clients. Valuation parameters include: Price/Earnings (PE), Price/Cash Flow (PCF), Price to Growth (PEG), and Price/Book Value (PBV). Actual portfolios will hold between 35-40 stocks.

Enhanced Yield Strategy

The Enhanced Yield Strategy seeks to achieve an average dividend yield that is higher than the current yield of the S&P 500. This strategy is comprised of common equity, ADRs and REITs that trade on US exchanges. The strategy consists of high quality companies that have sustained track records of positive dividend growth. We have a strong focus on company cash flow generation as an important driver of future dividend growth. We also leverage our time-tested, three-stage research process when evaluating securities to add to this strategy which typically includes 25 – 35 holdings. The goal of the strategy is to have lower risk and lower volatility than the S&P 500, as measured by beta.

Enhanced Yield
Top 10 Holdings

Microsoft Corp.

Intel Corp.

JPMorgan Chase & Co.

Cisco Systems Inc.

Chevron Corp.

Emerson Electric Co.

Pepsico Inc.

Marathon Petroleum Corp.

Anheuser-Busch InBev

CVS Health Corp.

 

“Weightings based on a representative account as of 6/30/2018 and subject to change. The specific securities identified and described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.”

Equity Income

Equity Income Select

Equity Income &
Equity Income Select Strategies

Generating steady income from traditional fixed income investments is a challenge due to the current low interest rate environment. The Equity Income and Equity Income Select Strategies attempt to overcome this by building diversified portfolios of income generating securities across asset classes and sectors. These strategies do contain more risk than traditional high quality bonds; however we believe the long-term risk is lower than reaching for yield within fixed income by focusing solely on long-dated or lower credit quality bonds. The primary objectives in selecting securities are the sustainability of the current dividend and the ability of the company to raise the dividend in the future. The Equity Income Strategy may be comprised of high dividend paying stocks, preferred stocks, and fixed income investments. The Equity Income Select Strategy, which is available for taxable accounts, may hold the same securities with the addition of Master Limited Partnerships.

Top 10 Holdings

Equity Income

iShares Tr U.S. Preferred ETF

Eaton Vance Floating Rate Fund

Wells Fargo & Co. Preferred

US Bancorp Preferred

Royal Dutch Shell

Bank of America Preferred

Merck & Co.

Bank of Nova Scotia

iShares High Yield Corp. Bond ETF

Alerian MLP ETF

“Weightings based on a representative account as of 6/30/2018 and subject to change. The specific securities identified and described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.”

Equity Income Select

iShares Tr U.S. Preferred ETF

Eaton Vance Floating Rate Fund

Wells Fargo & Co. Preferred

Royal Dutch Shell

US Bankcorp Preferred

Bank of America Preferred

Merck & Co.

Bank of Nova Scotia

iShares High Yield Corp. Bond ETF

Alerian MLP ETF

“Weightings based on a representative account as of 6/30/2018 and subject to change. The specific securities identified and described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.”

International Equity Strategy

Our International Equity Strategy is typically comprised of large-cap stocks that generate the majority of their revenue and profits outside the United States. Our focus on high-quality, industry-leading companies results in a well-diversified portfolio of global corporations.

The International Equity Strategy leverages Willingdon’s time-tested, three-stage research methodology. The process is top-down driven and has a strong emphasis on identifying quality businesses based on peer-to-peer analysis in each industry and sector.

The International Equity Strategy is a natural extension of Willingdon’s Core Equity Strategy. In today’s global economy strong companies must compete on a world-wide platform. Many of the companies that fit the quality criteria for the International Equity Strategy are peers, competitors, customers, or suppliers of companies that Willingdon has owned in the Core Equity Strategy over the years.

The International Equity Strategy focuses largely on identifying investment trends and opportunities in developed international markets but may invest directly in emerging markets provided the companies in question meet Willingdon’s quality criteria. Emerging markets can offer superior growth prospects due to favorable demographic and per-capita income trends. However, those growth opportunities often come with increased risk from factors including, but not limited to:

  • Volatile currency movements
  • Political/regulatory instability
  • Poor corporate governance standards
  • Lower financial statement transparency/reliability
  • Lower liquidity
  • Increased trading costs/complexity

Additionally, the International Equity Strategy may invest in small- to mid-cap companies if we determine that the business has a leading position in an attractive industry sector or niche. Smaller cap companies often have favorable growth prospects. However, the more favorable growth profile often comes with the following risks:

  • Lack of operational history and/or proven business model
  • More projection implied in market valuation
  • Lower liquidity
  • Less scrutiny from the investment community
  • Weaker access to capital

Actual portfolios will hold between 35-40 stocks.

Top 10 Holdings

NXP Semiconductors

Anheuser-Busch InBev SA

Canadian National Railway Co.

Coca-Cola European Partners

Alibaba Group Holding Limited

International Flavors & Fragrances Inc.

SMC Corp.

iShares MSCI Japan Small-Cap ETF

SAP SE ADR

Fanuc Crp.

“Weightings based on a representative account as of 6/30/2018 and subject to change. The specific securities identified and described within this presentation do not represent all the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.”

Thematic ETF Strategy

Our Thematic ETF Strategy focuses on identifying sustainable, game-changing secular trends, and building a diversified portfolio of ETFs which are directly exposed to these themes. Importantly, our research process distinguishes short-term fads from sustainable, long-term trends. To accomplish this important filtering process, we leverage our existing research and portfolio management methodology for the Core Equity Strategy. Some good examples of secular trends are the build out of the Internet in the mid to late 90s, social networking, the move to mobile devices, and the increasing role and importance of “Big Data”.

This strategy is relatively concentrated, holding 10-15 ETFs. At the same time, the overall philosophy of this strategy lends itself to significant exposure to technology-related sectors. Both factors are likely to make this strategy more volatile than the overall market.

Biotechnology – SBIO
As demographic trends point to an aging population, the need and the cost for healthcare services will continue to rise. As such, health problems in the areas of cancer, cardiovascular, autoimmune, and infectious diseases are sources of growth for biotech companies.

Cyber Security – HACK
As we become increasingly interconnected and more aspects of our daily life “moves” online, the need for cyber security increases in order to protect sensitive personal data and safeguard intellectual property. As such, we anticipate that cyber security will represent a larger portion of IT budget spending for companies and governments worldwide.

Cashless Consumption – IPAY
Digital transactions are expected to increase exponentially as global consumers become more accustomed to the convenience, flexibility, and efficiency of online, or mobile, payments.

Chinese Consumer – CHIQ
China’s historic move away from manufacturing to a more services driven economy will favor personal income growth and, of course, personal consumption. In other words, as disposable income increases, so will the demand for goods and services, and overall consumer spending.

Robotics and Artificial Intelligence – BOTZ
Increased labor costs and an aging workforce are both long-term challenges that automation and artificial intelligence intend to solve. Continuing advances in artificial intelligence and automation technology should enable more autonomous solutions that would increase economic productivity and growth.

Global Water – CGW
As the world’s population continues to grow and emerging economies expand, the rate of water usage will continue to accelerate, which will bring greater challenges to how this increasingly scarce global resource is managed. We believe scarcity will drive investment and innovation.

Semiconductors – SOXX
From personal computers to gaming and smartphones, semiconductors/microprocessors have been at the epicenter of all major technological innovations. We expect that trend to continue as the demand for higher power chips increases, driven by secular growth in areas like Autonomous Driving, Internet of Things, and Datacenters.

Aerospace and Defense – ITA
Global geopolitical instability should continue to support our investment in Aerospace and Defense. Throughout the developed world, defense expenditures have increased as countries appear to be engaged in a global arms race.

Rare Earth Metals – REMX
We expect that demand for rare earth minerals will remain robust as their properties make them essential in the production of a vast array of products such as electric vehicles, semiconductors and advanced smart weaponry. They have become a key part of today’s modern world and we expect that their applications will continue to grow.

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