Top Down / Bottom Up
At Chelsea, our outlook is international, with a macro world economic viewpoint. From this perspective we try to identify larger, global economic trends that can inform broad factors like inflation, interest rates, currencies and commodities. This understanding helps us determine sector and industry allocations and weightings. This portion of our analysis is generally called “top-down” and our firm’s top-down stock selection process is disciplined, repeatable, and research-driven.
Once these sectors and industries allocations are determined, we first consider the industry leaders as they tend to leverage their competitive advantages through both up and down economic cycles. We believe that both of these strategies increase the opportunity for long-term holdings that can enjoy compounded, tax-free gains for appropriate client accounts.
Though Chelsea determines which sectors should be given the most emphasis using a “top-down” approach, we then apply a “bottom-up” approach to evaluating the selections in terms of value and earning dynamics and business execution. These factors are considered based on expectations for each portfolio allocation at the time of purchase and thereafter. This on-going disciplined approach to evaluating individual stocks and bonds is central to our strategy.
In determining the categories in which to invest, we look for the leading sectors and the leaders within those sectors. Strong management is an important prerequisite in our analysis. We endeavor to identify, analyze, and select high-quality companies with management depth and integrity, strict corporate governance, healthy balance sheets, and consistent earnings growth, selling at a relative discount to what we consider their intrinsic value. We also search for companies with dominant positions in markets with what we believe to have higher growth potential ceilings.
Just as sufficient discipline in security selection is important, so too is monitoring each selections’ progress and development against expectations after purchase. Independent research, an arms-length relationship with corporate managements and caution formed from years of experience guide our investment team’s discipline.
Client portfolios are generally diversified among sectors we believe to have the best mix of long-term growth and income potential. But this diversification is just as important for a purely growth-oriented equity portfolio as it is for a defensive dividend-oriented portfolio. Global, even currency diversification can be another important diversification tool. Our equity investment philosophy is to build portfolios with a long-term view using larger capitalized, high-quality securities with the prospect of above-average growth and price/earnings multiples. Management typically also invests across all market cap sectors, with an emphasis on mega cap stocks (those with a market capitalization above $50 billion in U.S. dollars), large cap stocks ($20-50 billion), and mid-cap stocks ($4-20 billion).
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