Risk Management
Risk Management
The risk management rules for each model portfolio are established by the Juntoku International Investment Committee. These standards must be followed by the lead portfolio manager. The risk management principles are monitored and enforced by Juntoku International's compliance team.
We define risk as the potential loss of capital over time. We are working on managing three types of risk:
Valuation risk - To build in an extra margin of safety, we are looking to acquire equities at a discounted price.
Balance sheet risk - We prefer to invest in firms that are properly funded rather than those that are highly leveraged.
Earnings risk - We invest in firms for whom we have a thorough understanding of the elements that influence profits growth and decline.
Diversification requirements are specified in each Investment Policy Statement, including:
- The minimum number of sectors in which the portfolio must be invested.
- Market capitalization ranges.
- The minimum and maximum number of stocks in which the portfolio must be invested.
- The maximum investment in any one security as a percentage of the portfolio’s market value and as a percentage of the company’s market capitalization.
Scenario analysis
We calculate future profitability by creating multi-year projections for each firm and putting these projections through their paces with different scenarios such as higher/lower sales and higher/lower input costs. When quarterly earnings reports are released, as well as at other times as needed, our analysts update these models. This scenario analysis gives us a reasonable range of price objectives to aim for.
Investment Grade Rating
Our analysts fill out a rigorous Investment Grade Checklist as part of their study on a firm. The ultimate result is a rating of a company's overall quality. This grading system serves as a risk management tool by restricting the portfolio manager's maximum weighting in a specific position. As the grade progresses from the lowest acceptable quality to the highest, the maximum permitted weighting increases.
Portfolio Construction
The portfolio manager consults with the research analyst and counts on investment review to construct the portfolio. Before reaching a final decision, the portfolio manager requests advice and constructive criticism from his analysts and the Investment Committee.
The analysts and the portfolio manager discuss over any significant changes to the companies they are evaluating. The portfolio manager organizes formal meetings where the analysts discuss their companies. Analysts go over the firms in the portfolio first before moving on to the ones outside of it. They must demonstrate why these companies deserve to be kept in the portfolio. The analysts debate some of their colleagues’ insights. The portfolio manager serves as chairman and mentor, and the meeting is characterized by a free flow of ideas.
There are three aspects that can influence the portfolio manager to remove a stock from the portfolio:
- The stock reached its fair value
- Quality has declined
- The catalyst for the investment thesis has been impaired
The portfolio manager controls the positions within the portfolio using a model weighting approach that takes into account analyst feedback as well as the portfolio manager's personal assessment of each stock's greatest overall value in the portfolio. Weightings will fluctuate in response to market volatility, and rebalancing may occur on a regular basis. Individual weightings may be adjusted in response to changes in investment grade ratings for individual companies (upgrades or downgrades). Our weightings differ from those used in the benchmarks. We buy and hold stocks because of positive performance, and we usually hold more of them than the benchmark.