High Income Equity Portfolio

Introduction

High Income Equity Portfolio Introduction

The Grisanti Capital Management High Income Equity Portfolio (“HIEP”) has three guiding principles: 1) to protect capital in turbulent markets, 2) to provide the potential for capital appreciation and 3) to generate better than average current income.  This conservative approach is designed to deliver a steady return in most market environments.  The product may (but not always) forgo some performance in rapidly rising markets as a consequence of its focus on protecting capital.  The portfolio is concentrated, typically holding 20 to 30 securities.  Cash is a residual of the investment process and will, at times, account for a greater proportion of total assets than an index oriented product.

Conceptually, the HIEP is constructed as a three-legged stool, with a leg designed for each of the objectives outlined above: income, appreciation, and safety.

In the income leg, we look for securities that offer current yields that are greater than twice the yield of the S&P 500 and have the potential to grow faster than the rate of inflation.  High yields alone are not sufficient to qualify for inclusion in the portfolio.  We also look for solid businesses with defensible franchises and prefer to invest with trusted management teams with long histories of returning cash to shareholders through dividends or buybacks.  We remain mindful of the risks to income-producing securities of all kinds in a rising rate environment and have purposefully selected securities for this leg that benefit from economic growth and have minimal sensitivity to general interest rate risk.

The leg of the stool designed for capital appreciation shares many of the same qualifications as the leg designed for income.  Solid underlying fundamentals, strong management and undemanding valuation are all important.  However, in this group we are specifically searching for situations where we believe the stock price has become disconnected from the underlying value of the business, resulting in an opportunity for outsized capital appreciation.  The sources of these opportunities are varied and constantly changing, but generally come down to investor fear or misunderstanding of some issue the company or industry is facing.  We expect that the securities in this bucket will be more volatile than the portfolio overall, but mixing them with the more stable parts of the HIEP portfolio (income and safety) we believe the risk is mitigated (though not eliminated).

The last leg of our stool focuses on safety.  We look for securities that can provide the portfolio with the stabilizing influence of cash without the full opportunity cost of having a large portion of your assets in a zero return instrument.  Ideally these securities have a Beta of less than 0.7 (less than 70% of the market’s volatility) or have exhibited minimal (or even inverse) correlation to the S&P 500.  Companies that qualify for inclusion in the safety portion of the portfolio exhibit a market leading position, stable and durable excess returns, superior management, and relative insensitivity to sharp market movements.

 

To learn about our High Income Equity Portfolio’s performance, email us at info@grisanti.com.

 

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