We believe that long-term stock price appreciation
is based on long-term earnings growth. Sustainable earnings growth
is predicated on dominance in an attractive industry. Dominant businesses
usually reside in large companies and can produce superior earnings
growth and market leadership over long periods of time.
Our philosophy has produced excellent historical
investment results for our clients. Importantly, our firm has consistently
delivered these results since 1958 in a wide range of economic and
market environments. Today, we employ the same process and many
of the same people which produced our historical results; we believe
that our clients' portfolios will be equally successful in the future.
To shape our investment portfolios, Fayez Sarofim
& Co. utilizes a combination of "top down" strategy formulated by
our Investment Committee and "bottom up" purchase and sale recommendations
presented to the Investment Committee by industry analysts. The
Investment Committee, comprised of the most senior investment professionals
at the firm, provides an economic and market outlook. Individual
security analysts take this outlook into account while researching
companies in their assigned sectors and prepare purchase and sale
recommendations based on internally generated fundamental research
and valuation analysis.
The interaction between both "top down" and "bottom
up" analysis helps to identify long-term trends, guiding Investment
Committee decisions on sector emphasis and stock selection. Our
process attempts to identify attractive sectors to emphasize as
well as less attractive sectors to avoid. Consequently, our portfolios
may deviate substantially from published index weightings of industry
groups and companies.
Our investment philosophy leads us to construct
a portfolio comprised predominantly of large capitalization, US-based,
multinational companies. These companies are global leaders in structurally
attractive industries. They benefit from increasing global market
share, ongoing product introduction or innovation, and productivity
enhancements three key drivers of long-term earnings growth.
In addition, their financial strength allows them to make profitable
investments at any point in the economic cycle. We believe these
businesses are most capable of generating superior growth in earnings,
dividends, and cash flow over time, leading to greater capital appreciation.
Investing in high quality companies at reasonable prices also produces
two additional advantages for our clients low portfolio turnover
and a higher likelihood of preservation of capital.
In the fixed income area, our objective is to
provide a positive return annually, thereby preserving the capital
base even during declining markets. Over an entire interest rate
cycle, we expect to earn a rate of return in excess of inflation.
To meet those objectives, we consider the analysis of future economic
conditions as we expect them to affect bond prices and yields, the
systematic translation of strategy into immediate portfolio action,
and the accuracy and timeliness of credit analysis.
A basic tenet of our fixed income strategy has
always been that longer-term trends in interest rates are largely
determined by inflationary trends. Higher duration targets can be
expected when interest rates exceed inflation and inflation trends
are projected to be stable or to decline. Expectations of higher
inflation typically produce a more conservative bond portfolio.
Credit research is an ongoing process of our non-government bond
holdings to insulate the portfolio from any credit downgrades
and to provide security selection opportunities. Corporate bond
issues have to be on our approved list prior to purchase.