The PRT Equity Strategy and Investment Process Rules based investing

Transcription

1 The PRT Equity Strategy and Investment Process Rules based investing Michael Collins Financial Advisor Portfolio Management Director- PM Program The Collins Savrann Group at Morgan Stanley

2 The PRT Equity Strategy - Prime objective: Capital appreciation Current income: Secondary concern - Employs systematic rules based investment process - Predefined rules cover all aspects of investment process - What to buy - When to buy - How much to buy - When to add to existing positions - When to sell

3 PRT Strategy- Core Investment Tenets Strategy based on 4 core beliefs: - Stocks which report better than expected profits tend to outperform those that don t - Stocks exhibiting superior relative price performance tend to maintain strong price momentum in the absence of negative events - Minimizing losses and leveraging winning positions is extremely important in achieving significant portfolio returns - A disciplined investment strategy is needed to achieve investment success

4 The PRT Strategy Rules Entries: What to Buy - Investment process- Bottom up analysis - Quarterly earnings reports - reviewed daily - Must satisfy all 4 specific purchase criteria - Company quarterly report must significantly exceed the mean analyst estimate by at least 20%. Positive earnings surprise * - Stock price must close at least 7% higher in price after positive earnings release - Stock price must exhibit superior long term relative price (RS) performance at the time of earnings release (Top 10%)** - Stock must trade a minimum of 100,000 shares daily * Analyst Estimates obtained from Bloomberg ** RS ratings obtained from William O Neil (Market Watch)

5 Entries: When to buy Strategy based on the assumption that the greatest probability for future price appreciation will occur immediately after a positive earnings announcement Strategy is selective- 8,574 positive earnings surprises reported in approximately 2% satisfied Buy criteria BUY orders are generally entered the next trading day after all 4 selection criteria are satisfied

6 Entries: How much to buy An initial 2% position is purchased Example: A $1,000,000 portfolio will invest approximately $20,000 per position initially

7 Entries: Adding to existing positions Initial 2% position can be increased only if stock moves above initial cost. Initial position will not be added to if stock falls below initial cost. Increase in position size is determined by a volatility based algorithm- Average True Range (ATR). ATR is measure of each stock s daily volatility. Initial position can be doubled in size when the stock trades at 1.5x ATR above cost. Example: Initial 2% purchase at $20. At time of purchase, the stock has a $1.20 ATR. Therefore, an additional 2% position can be made at $21.80.

8 Exits: When to Sell Strategy utilizes a disciplined system of stop orders Designed to protect profits, control volatility, and limit losses Total portfolio risk is controlled by limiting the risk of each individual holding 2 stops utilized: Initial stop and Trailing stop

9 Exits: Initial Stop Initial stops are set at the time of purchase Any 2% holding will have initial 20% stop loss order Initial stops are placed such that, if executed, no individual loss should be greater than.4% of the aggregate portfolio Initial stop should represent the maximum risk for any single holding Initial stops are never lowered and once violated the position is exited.

10 Exits: Trailing Stop Initial stops will be increased in price as the stock appreciates from cost, thereby protecting profits Calculation of this trailing stop is determined by utilizing the ATR value. Stop price= Most recent closing high since purchase price-(3xatr) Trailing stops are reviewed daily and adjusted accordingly. Position is sold once trailing stop is violated

11 Summary PRT Strategy designed to produce above average risk adjusted returns Selection process designed to find market leaders Portfolio management process designed to limit losses, control volatility, and maximize exposure to winning positions Rules based investing: - automates the investment process - limits negative effects emotional factors may have on the investment process

12 Top Portfolio holdings as of 3/4/2016 company symbol company symbol Mistras Group mg LendingTree tree 8X8 Inc eght Wayfair w Mercury Systems mrcy Stamps.com stmp Central Garden cent Herbalife hlf Oclaro oclr Magellan Health mgln Orasure tech osur Lexicon Pharma lxrx Take Two Interactive ttwo Neophotonics nptn Post Holdings post American Vanguard avd Tyson Foods tsn Bruker Corp brkr Ellie Mae elli Rovi Corp rovi Employers Holdings eig Gibraltar Industries rock First Solar fslr Five9 Inc fivn Green Dot gdot Lemaitre Vascular lmat

13 Current Portfolio Statistics* Strategy tends to isolate small/mid cap companies Average current market capitalization = $2.5 billion Portfolio Beta = 1.07 Active Portfolio Turnover *As of 3/4/2016

14 About the PM Program Established in 1979 to provide individual investors with a level of personalized portfolio management typically reserved for major institutional investors. All portfolios are managed individually on a fully discretionary basis by Financial Advisors at Morgan Stanley who have been qualified by the firm to independently manage client assets based on training, experience and commitment to service. As your portfolio manager, I and my team can offer you: Direct access to the investment professionals managing your portfolio. Personalized service. A disciplined, multipart investment process. Ongoing client communications and reporting. Access to the intellectual capital and global resources of Morgan Stanley.

15 Disclosures The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material is intended only for clients and prospective clients of the Portfolio Management program. It has been prepared solely for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in ant trading strategy. The individuals mentioned as the Portfolio Management Team are Financial Advisors with Morgan Stanley participating in the Morgan Stanley Portfolio Management program. The Portfolio Management program is an advisory program in which the client s Financial Advisor invests the client s assets on a discretionary basis in a range of securities. The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at or from your Financial Advisor. Past performance of any security is not a guarantee of future performance. There is no guarantee that this investment strategy will work under all market conditions. Holdings are subject to change daily, so any securities discussed in this profile may or may not be included in your account if you invest in this investment strategy. Do not assume that any holdings mentioned were, or will be, profitable. The performance, holdings, sector weightings, portfolio traits and other data for an actual account may differ from that in this material due to various factors including the size of an account, cash flows within an account, and restrictions on an account. Top holdings, sector allocation, portfolio statistics and credit quality are based on the recommended portfolio for new investors as of the date specified. Holdings lists indicate the largest security holdings by allocation weight as of the specified date. Other data in this material is believed to be accurate as of the date this material was prepared unless stated otherwise. Data in this material may be calculated by Morgan Stanley or by third party providers licensed by the Financial Advisors or Morgan Stanley. Material in this presentation has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy, completeness or timeliness. Third party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. Morgan Stanley has no obligation to notify you when information in this presentation changes. Equity securities may fluctuate in response to news on companies, industries, market conditions and the general economic environment. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice.