Core Strategies

Our core strategies in managing client portfolios
Alpine Private Capital Core Strategies

The two core Alpine Capital Research strategies that Alpine Private Capital utilizes in managing client portfolios

Equity Quality Return (EQR)

Summary

  • EQR’s investment philosophy is rooted in principles essential for successfully evaluating fundamental value and risk, which we believe is the key to investment success.
  • The orientation is that of a private investor buying a select group of quality businesses with solid operating characteristics, rather than a style sensitive portfolio manager concerned about price fluctuations relative to a benchmark.
  • ACR only invests in what we understand. True understanding is built upon high probability statements about businesses and values. Achieving better than average returns requires understanding security values better than average.

Objectives, Performance, and Benchmark

EQR was developed according to Alpine’s published investment principles and is managed exclusively by Alpine Capital Research LLC, an affiliate of Alpine Private Capital. All strategy investments are required to be consistent with these principles.

 

EQR objectives are to provide satisfactory absolute and relative results in the long run, and to preserve capital from permanent loss during periods of economic decline.

 

“Satisfactory absolute results” means earning a return which is fair when considering the risk taken. Each stock is assigned a “required return” which reflects its risk. This is also the return (or discount rate) which equates its present value with its future dividends or free cash flows. “Absolute” means the return is related not to the general stock market, but to the specific rate chosen which reflects the stock’s risk. The objective is to generate a sound absolute result in the long run regardless of general stock market returns.

 

“Satisfactory relative results” means a return which exceeds the market average over a full market cycle, typically from seven to ten years. The EQR strategy benchmark is the S&P 500. The S&P 500 was chosen because it best reflects the quality of the holdings selected for the strategy.

 

Returns may vary widely, either positively or negatively, from the absolute expected return and the S&P 500 in the short run. Stock portfolios are not constructed to minimize volatility or return differences from the market. The focus is on selecting the highest returning individual issues for the long run rather than focusing on short-term fluctuations among groups of stocks. The evaluation of returns presents only half the picture. Risk must also be evaluated. While return data can be generated easily, the quantification of risk is difficult.

 

“To preserve capital from permanent loss during periods of economic decline” means selecting companies that can withstand difficult economic conditions. Permanent loss occurs when a large portion of a company’s assets or earnings becomes permanently impaired or when an unexpected bankruptcy or liquidation occurs. The nature of a company’s business and its financial strength are carefully evaluated to determine its ability to weather adverse economic conditions.

Security Types, Selection Universe, and the Use of Cash and Leverage

EQR invests only in publicly traded marketable common stocks with corporate headquarters in the U.S. and Canada. Common stocks with corporate headquarters outside the U.S. and Canada may comprise up to 20% of the market value of the portfolio.

 

Importantly, EQR invests in companies of any size including large, mid, and small capitalization stocks. Larger companies are more likely to be purchased because of the safety and competitive advantage which size sometimes confers. Nevertheless, quality and valuation remain primary selection determinants.

 

Alpine EQR’s preference is to remain fully invested. However, cash is oftentimes held. Alpine EQR strategy is to own a select group of businesses with the orientation of a private investor; therefore, when a new account is established businesses are selected one at a time. The EQR strategy will hold cash when there are no attractive opportunities and prices exceed values in the selection universe. We will not put our clients’ capital at undue risk simply for the sake of remaining fully invested.

Investment Quality

Quality businesses have a fundamental value which is sound. Quality stocks have a significant margin-of-safety between fundamental (intrinsic) value and market price. EQR Policy is to buy quality businesses and stocks. Net cash income is the substance of fundamental value. Therefore, business quality is contingent upon the nature, protection, and use of corporate net income. The following are business quality characteristics required for a company’s inclusion in the EQR strategy:

 

1.  Net income can be counted on for many years in the future.
2.  Debt can be serviced regardless of economic conditions.
3.  Capital is either productively employed or returned to shareholders.

 

The business factors determine the financials. Two requirements among these business factors are: (a) management is competent and honest, and (b) the company has a sound competitive position.

 

The following characteristics of business quality are desired, but not required: (a) a strong and persistent competitive advantage, (b) a high return on capital, and (c) the potential for long-term growth. The duration of high returns and growth are estimated conservatively, since the future is unknown and high growth / high return companies attract competition.

Portfolio Diversification

EQR Policy regarding diversification is to strike a balance between proper diversification and proper concentration as described in Alpine’s published investment principles. The following portfolio holding guidelines were designed to achieve the balance described above. The holding target is twenty stocks, but will vary based on market conditions. Maximum security position size at purchase is 10%. Maximum security position size at market is 20%. Maximum industry position size at cost is 15%. Maximum industry position size at market is 30%. Maximum levels are rarely expected to be reached. Requirements at the maximum purchase level are exceptional quality and extreme under-valuation.

Holding Period and Sell Discipline

The anticipated holding period at purchase is at least ten years. Businesses are purchased for long run earnings accumulation rather than short run price appreciation. Many years are required for an appreciable portion of earnings to accumulate even relative to a reasonable purchase price or rapid growth rate.

 

Stocks are sold for three general reasons: (1) an unanticipated change at the company (2) an error in the analysis of the company, (3) a significant price increase coupled with the opportunity to buy an under-valued stock.

Income and Appreciation

EQR Policy is to invest for total return from both dividends and capital appreciation. The highest return stock portfolio for the risk will have some stocks that pay high dividends and others that pay low or no dividends. In our opinion, investor cash needs will be more profitably satisfied by investing in fixed income securities outside Alpine EQR rather than limiting our stock selection universe to either income producing stocks.

 

Companies are selected because they possess strong operating characteristics and managers who deploy net income effectively. ACR believes managers should reinvest net income only at satisfactory rates of return. Otherwise, dividends should be paid or shares repurchased (when at low or fair prices).

Tax Sensitivity

Taxes are explicitly considered in taxable accounts. The income and capital gains rates of tax paying owners or beneficiaries are recorded. Securities are then evaluated for purchase or sale based on expected after-tax returns.

Fixed Income High-Grade (FHG)

Objectives, Performance, and Benchmark

FHG was developed according to Alpine’s published investment principles. All strategy investments are required to be consistent with these principles.

 

FHG objectives are (a) to protect capital from loss of principal and interest by investing only in very high grade fixed income securities, (b) to provide cash flow and liquidity via interest income, regular maturities, and price stability, (c) to obtain the highest after-tax yield possible without sacrificing credit quality standards.

 

An index for comparative purposes is not selected. Traditional indexes do not have a comparable term structure, and the construction of a custom index would be ineffective.

Security Types, Selection Universe, and the Use of Cash and Leverage

FHG primarily includes very high grade fixed income securities of the U.S. government and its agencies, state and local municipalities, and corporations. Asset backed securities, mortgage pass-through and other securities with multiple option payment streams may also be considered for investment, provided that they meet the objectives and quality standards established in this policy.

 

FHG invests primarily in fixed income securities of enterprises or municipal governments located in the U.S. Fixed income securities of enterprises or municipal governments located outside the U.S. may comprise up to 15% of the market value of the portfolio.

Investment Quality

Quality is the most important element of the FHG strategy. Investment quality is limited to the highest quality enterprises and securities in the economy as determined by ACR’s assessment of their economic durability and financial strength under extraordinary economic circumstances.

 

Quality is subject to the margin-of-safety principle. The principle is to purchase a fixed income security only when the available cash income or assets backing the security are sound and significantly greater than the interest and principal payments due the security holder.

 

Quality is also defined by price stability. Alpine is primarily concerned with intrinsic quality characteristics such as cash income and assets rather than price characteristics. However, liquidity is an objective of the strategy, and price stability is an important element of liquidity. Price stability relative to equities is therefore a liquidity requirement.

Portfolio Diversification

The number of bonds in a portfolio is contingent on the size of each client’s portfolio.  No single issuing corporate enterprise, government municipality, or asset backed security will comprise more than 5% of the client’s total portfolio.  U.S. Government guaranteed securities have no maximum investment constraints.

Term Structure

The primary objective of FHG term structure policy is to provide stability and liquidity.  Therefore, fixed maturities normally range from one to ten years.  The secondary objective of FHG term structure policy is to protect the portfolio from inflation.  FHG avoids intermediate-term and long-term fixed instruments at low rates, since such instruments are at risk of protracted negative after-inflation returns.

 

Maximum portfolio duration is targeted at five years or less.  When certain minimum yield requirements can be met or exceeded, maximum portfolio duration is increased to ten years or less.

 

Fixed income maturities are held to maturity unless cash is needed or an overall portfolio strategy change has been directed and/or approved.

Tax Sensitivity

Taxes are an explicit consideration in all client accounts. The tax rates of tax-paying owners and beneficiaries are recorded.  Yields are then compared on an after-tax basis to determine whether or not taxable or tax-favored issues are most advantageous.

Learn more about other investment strategies that we use