Diversified Portfolios Make It Steady As She Goes
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Posted On :
May-10-2010
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Article Word Count :
1073
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One thing that has sustained successful companies over time is a well-developed moral compass. A company that loses its moral foresight will eventually fail as it causes pain to its employees, society, communities, and, of course, its shareholders.
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One thing that has sustained successful companies over time is a well-developed moral compass. A company that loses its moral foresight will eventually fail as it causes pain to its employees, society, communities, and, of course, its shareholders. Few public banks, brokerage firms and finance firms whose morality has lapsed went unscathed when their focus strayed from their clients and honed in on their short-term gains.
Notable examples are Toyota and the US Auto industry. For years, Toyota focused its efforts on building quality and reliable vehicles. However, when their focus changed to becoming the largest automotive manufacturer, they subjected themselves to very serious consequences, which we’ve all seen in the news lately. The destruction of the U.S. auto industry was a result of upper management’s desire to use financial leverage to increase share prices at the expense of building quality vehicles at affordable prices. The new set of organizational pressures and incentives, with few options to obtain goals with legitimacy, has altered judgment and choices. Today, there aren’t as many “car guys” in upper management positions at the auto companies. Rather, financial engineers seem to have taken over.
Finances are indeed important, but from my experience those companies that put their customers’ needs first run a conservative financial profile. Any reasonable and educated person with an ounce of common sense knows that the world is always changing. Common sense managers know that customers’ wants will change, innovation will make last year’s products less desirable, and that customers and clients need quality products and need to be treated with respect and gratitude.
Growth in Earnings per Share (EPS)
It seems that private companies do a much better job with a virtue-oriented business model than public companies, with is rational. Public corporations are judged mostly on growth in earnings per share (EPS), profit growth and shareholder return. As an investment manager we want to invest in companies that place value and emphasis on their product or service and who care about their employees, shareholders and other stakeholders with equal reverence. We also seek out family-owned/ operated companies in which the major shareholders are the families themselves.
Anecdotally it seems that companies with conservative finances and virtue-oriented management think that paying their shareholders good cash dividends is just good business. At FIM Group, we seek out companies that pay good dividends, have a history of paying dividends, are well capitalized, have conservatively managed financial structures and have a record of profitability coupled with great quality products and services.
We also project into the future and anticipate whether we can see companies’ cash flows and dividends increasing over the years. There are a significant amount of parameters that go into selecting a stock for a diversified portfolio; however, dividends are an emphasis, particularly for those clients who are near retirement or are enjoying it currently.
It Pays to Be Global
FIM Group has always been a global manager. When it comes to dividends, global is where it’s at.
Cash dividend yields an average dividend yield of 6.39%. To give some perspective, the current dividend yield for the S&P 500 index is just 1.84%. Since 1926, 45% of the U.S. total return from the S&P 500 was from dividends. From that we can logically assume that even in our robust growth booms in the 1950s, 1960s, 1980s and 1990s, dividends do matter. In the rapidly growing economies and companies we favor, we expect (especially for retirees who need cash income now, not growth later) a similar positive end result.
Four Winds of Positive Performance
There are four return components for a global investor: 1) Dividends; 2) Growth in underlying share value through increased earnings; 3) Increase in share value as investors are willing to pay more for those earnings (PE expansion); and 4) Currency returns. For example, if you own a Swiss, German, Singapore or non-U.S. company, there is potential for capital appreciation purely by the U.S. dollar weakening against the currency. Of course it could go against you, and as we know currencies, investors’ psychology and earnings can go up and down, and if a company’s prospects or markets weaken dividends could be reduced or eliminated. That is one reason FIM Group believes indexing portfolios is a losing strategy. Why wouldn’t you want to sell investments as their prospects erode and embrace investments with good prospects? The asset allocation chart by country indicates FIM Group’s investment around the globe. Our portfolios are well-diversified and actively managed, which helps reduce volatility and increase the potential for steady returns over time.
Adam Smith and Doing the Right Thing
I am a believer in free market capitalism. I am also realistic about human nature and realize that many people will be driven by greed, ego, lack of a moral compass or plain ignorance. Many unethically manipulate the “system” to their benefit at the expense of others. Typically unethical business practice involves the cooperation of others and reflects the values, attitudes, and beliefs that define an organization.
According to Stephen Young, global executive director of the Caux Round Table, an international network of principled business leaders working to promote a moral capitalism, “Moral sentiments stand for the proposition that listening to our moral sense, exercising our capacity for sympathy for others, and listening to an inner source of wisdom is the proper standard for human conduct. Wealth of Nations, by Adam Smith (1776) on the other hand, is often portrayed as a work that elevates self-regard as the proper norm for our interactions and that proudly grounds capitalism on self-seeking of profitable advantage.”
Humans naturally seem to know right from wrong, and Adam Smith felt that people would be guided on balance by moral- and virtue-oriented principals, either self-imposed, or socially imposed by religion, government or laws. I grew up being taught to do the right thing, and as a result an underlying tenet in FIM Group’s philosophy is to favor companies that seem predisposed toward doing the right thing.
I have been reading How to Create a Winning Organization by John Wooden and listening to his audio book about his philosophy. Coach Wooden’s ten NCAA championships, Coach of the Century Award and pyramid of success prove that having a well-developed moral compass results in success – but as he says, that is not the point – the point is doing the right thing.
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Article Source :
http://www.articleseen.com/Article_Diversified Portfolios Make It Steady As She Goes_18378.aspx
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Author Resource :
FIM Group’s Article Source: WhyisFinancialPlanningImportant.net
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Keywords :
free market capitalism, financial planning so important, definition of financial planning, Financial & Investment Management ,
Category :
Finance
:
Finance
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