Q: Joe, give us some background on PVG Asset Management.
A: We formed PVG Asset Management during the last half of 1987. My partner, Bill Rahmig and I decided we wanted to build a modest size, easily manageable investment firm. We had each spent 20 to 30 years managing portfolios and building our own and other's larger firms. We like money management, not people management. PVG is a smaller and more personal operation. Our focus is making consistent money for clients, along with the best possible service. It shouldn't be any surprise to investors that we believe diversification is the best way to accomplish the first goal. We employ a "top down" investment process, first exploring investments throughout the global markets, then different security types and investment concepts. Individual security analysis is important to us only after our macro analysis provides direction. Individual securities we find attractive go on our managed universe list classified by market, security type, and concept. For instance, a stock may be a middle capitalization, value stock, attractive because it participates in airline industry restructuring. We build portfolios from the list, buying and selling only when we find prices attractive and the need in a portfolio.
Q: How many partners and portfolio managers do you have?
A: Bill Rahmig, the Invesco Funds Group, and I own PVG. Bill and I manage money. We also employ two other portfolio managers. We find that our extensive experience is important to our clients. All our managers have from 23 to 33 years' investment experience. Our experience includes market cycles dating back to 1961, over 100 years combined. We have managed funds for some leading investment management firms. So many portfolio managers with mutual funds and investment firms lack bear market experience. Our people are our strong point.
Q: Where does Invesco fit into the PVG organization?
A: When we put PVG together during 1987, management at the Invesco Funds Group, then the Financial Funds, liked our people and our management ideas, particularly concerning corporate 401(k)'s. They provided us with venture capital and investment research for 25% of the new firm. We are, however, independent, and receive no management direction from INVESCO.
Q: You obviously work with 401(k) accounts. What other kinds of clients do you serve?
A: The largest portion of our assets are 401(k) and other corporate plans. We typically provide one option, out of say 4 or 5 to 401(k) plans. This is our Global Balanced Account that provides a one decision investment for employees. This account is diversified and managed for "total return" similar to many larger corporate pension funds. Many smaller plan sponsors find it attractive because we are able to start with a small account balance without compromising our investment management process. We provide the same type account for individuals who may be rolling over their 401(k) or other funds into IRA's, and to smaller corporations, endowment funds, foundations. We also provide middle capitalization investment management to some of the same clients. Middle capitalization stocks represent some of the fastest growing American and international companies. They make attractive, lower risk equity investments during this period of world economic change and slow growth. Typically, the portfolio represents the "growth" element of an already diversified portfolio.
Q: What is your investment process?
A: Our investment philosophy is the best place to start. Investors have witnessed the explosive growth in the domestic and international capital markets. We have many new kinds of managers and funds specializing in narrow sub-market segments of these global markets. Of course, there never has been a single stock market. It's just that investors are aware that different markets and sub-market groups in the United States and around the world have their own unique trading patterns, risk, return, and other performance characteristics. Investment opportunities come up as investors move money between these markets. We believe investment management today requires a greater awareness of these many markets and money flows. A manager focusing on a broader number of markets and more numerous security groups with a disciplined approach can add significant value to a portfolio. Our management process is a continued exploration and study of global economic, political, business, social, and financial data. We're looking for trends, developed or developing, which cause assets to shift from one market to another. We are trying to determine whether these trends are based upon what we consider real change or just perceived changes. We want to have a grasp of whether the different markets are becoming over or under valued because of these investment flows. With this understanding, we'll allocate a client's money among the markets according to their stated return and risk objectives.
Mid-Cap portfolios are developed with this same process, however we focus security selection on the middle capitalization stock groups. Our allocations' decisions deal with the big picture. We're looking for trends likely to be with us for a while. After making allocation decisions, we look at more narrow groups of securities. Then we look at individual stocks and bonds that will be the beneficiaries of the larger trends. Securities are studied pretty traditionally. We're looking for companies with the opportunity to accelerate sales and earnings' growth because of industry change, and because of new products, or changes in product mix, and other changes likely to improve profit margins. We add those we like to our managed "universe" list. Once on the list, we continue our study of each investments' fundamentals, but we also begin looking at the company's stock trading characteristics and prospects. We think it is important to consider how investors in these stocks react to market changes and news about the company. Even though these short term price changes are not significant to a company's long term outlook, they are extremely important to determining the best possible entry and exit opportunities.
Q: Would you talk more about your managed universe if you could?
A: Stock and bond prices obviously change daily, sometimes by significant amounts. Opportunities to buy or sell at attractive prices often present themselves for very short periods of time. We have to be confident about a company's fundamental outlook and our future value judgments on a security to step up and take advantage of these opportunities. We don't have time to rethink our reasoning, each time a price changes. Our managed universe allows us to study and understand the markets and individual companies away from the hectic activity of the trading day. Another advantage is that, having pre-thought our ideas, our portfolio cash balances result from what we consider unattractive relative valuations, rather than a lack of ideas.
Q: How does your generalist approach serve client needs?
A: We focus on our client's individual goals. Initially, each portfolio is constructed with a combination of investments that are proven most likely to meet those goals. To come up with investment guidelines, we'll work with a client's consultant or take the time ourselves. We emphasize that no single investment allocation is right for all time periods. The investment return and risk characteristics of all markets are constantly changing in the near term, absolutely, and relative to each other. It's the portfolio manager's job, our job, to manage the investment combination while maintaining diversity for the client within the context of their stated goals. This is as true for our Mid-Cap as for our Global Balanced Portfolios. Incidentally, we call our Global Balanced accounts Multiple Market portfolios. I think it is important to emphasize that Multiple Market portfolios are not balanced in the traditional sense. Most balanced portfolios have limited diversity. They'll use only larger capitalization stocks and middle maturity investment grade bonds, for instance, not a combination of many different types of securities. Greater diversity reduces portfolio volatility and leads to higher return consistency over the long term.
Q: Would you talk more about stock selection?
A: We're looking for companies where sales or sales turnover growth rates are likely to improve, or where profitability is likely to expand. These are reasons for earnings' acceleration. Companies consistently growing at 20% per year are of less interest to us unless the whole sub-market of which they are part has dropped significantly in value. Otherwise, the market typically values these steady growers pretty fairly. Change is key. As companies improve results, market participants become more confident in their stock. They demonstrate that confidence by driving the stock's valuation and price higher. Periodically, these investors will get excessively optimistic or pessimistic and uncertain. These periods give us an opportunity to buy and sell these stocks at what we consider attractive prices.
As I indicated above, we choose to concentrate our study on companies benefiting from global economic, political, business, and social changes, rather than just internal management, or corporate improvement. We think these changes have more staying power. We also think a stock has more potential when all the positives are lined up behind us: We like the market; we like the sub-market; we have a group or conceptual reason for looking at the stock. For diversification, we usually are working with 5-10 broad "concepts" at any one time. We'll use stocks with low or high price earnings ratios depending upon the type of investment we are considering. For instance, we think it isn't wise to avoid the communications area just because these stocks have higher price earnings ratios. On the other hand many low valued consumer stocks are also attractive to us. As I mentioned, we buy and sell stocks from our universe when their prices reflect excessive swings of investor emotion one way or the other. We also will buy or sell portions of a position already established to change a client's allocation mix based on the valuation of these markets relative to each other.
Q: And your fixed income selection process?
A: Again, we are looking for global changes, the results of which are not completely or fully anticipated by other market participants. Or at least other investors have not acted on their views. For example, some people are still coming to the conclusion that European and American inflation and interest rates may head lower as our economies grow slowly. Many haven't acted yet. This is a strong argument for bonds, and for many investment grade or lower rated international bonds. The improving credit quality of many Latin American bonds is also a trend that has attracted our attention and the attention of others, but that hasn't been fully exploited. As with stocks, we try to have patience when buying these securities. Some bit of news and a change in investor attitudes always provides an attractive purchase point to the disciplined manager. We have to watch the markets and not let prices sway our long term outlook.
Q: You mentioned that you can take small accounts, like new 401(k) accounts, Would you expand on this?
A: Smaller investors are often restricted to focusing on one or two markets because of their size. This can cause an investor's portfolio risk and return characteristics to be out of line with their long term goals. To solve this diversification problem, we included closed and open ended funds in smaller accounts. Even in larger accounts, funds allow us to efficiently invest in highly specialized markets or those which involve expensive custodial and transaction expenses. Examples include the fixed income and overseas markets.
Q: What is your portfolio turnover?
A: We are fairly active. We average over 100% annually. Turnover is high because our trades can relate to either market reallocation or to individual security decisions. For example, we may reallocate a client's investment mix by reducing a whole group of securities by 5%, with a corresponding increase in another group. This decision triggers partial sales in many securities and contributes to turnover. Your Multiple Market approach sounds familiar to the work we do here regarding asset allocation.
Q: How is your style different?
A: It is similar. We recognize the cyclical results of fund managers focusing on narrow market segments. We choose a mix of markets in which to allocate a client's funds for this reason. We differentiate ourselves in how we arrive at the initial investment mix and in how we manage the mix. Historical relationship between markets, the input data, is often not dependable enough to make mathematically based projections that are useful in the short term. We use our experience from actual money management to supplement long term historical information. We also manage a client's allocation differently. Re balancing an account back to a predetermined optimal mix is the most popular passive approach. Take money away for your winners and give it to your under performers. This can be unpopular with clients. More importantly, re balancing based on historic numbers can be a trap. Evidence suggests that investments don't always perform as long term results would suggest. Bonds, for instance, had much higher returns than expected during the 1980's, particularly relative to stocks. Larger capitalization stocks also performed much better than expected. Following long term statistics, an investor might not have been optimally allocated for this period. Furthermore, these results might have led to reallocation away from both market areas, regardless of their future potential. We try not to become fixated on the use of just historic numbers. Markets are too complex to be summarized by historic results and mathematical relationships. Our value lies in the ability to use newer quantitative tools and the judgment which comes from years of experience. We don't believe any single investment allocation is correct for all market conditions.
Q: Sounds like market timing?
A: All money management involves the use of timing. Everyone has to decide when to buy and sell securities. However, we construct and manage portfolios differently from a timer. For example, a client may want a 60% allocation to stocks and 40% allocation to bonds. We'll create additional allocation targets for large capitalization, medium capitalization, and small capitalization stocks, and for international stocks from various regions of the world. We'll set management ranges for each of the investments. Large capitalization stocks might be targeted at 20% of a portfolio with an allowed range of between 15% and 30%. This client would never have less than 15% or more than 30% invested in larger stocks regardless of how we feel about this market. There are market environments in which larger stocks will outperform other market segments. We're just not willing to bet the client's farm on our ability to anticipate this time correctly, all the time. The consequences of being wrong are too great. We'll adjust the portfolio, possibly taking some money away from smaller capitalization or international stocks when we feel strongly. Broad diversification, however, is locked into the portfolio by the ranges that a client and consultant specify for us. Furthermore, we move money only in small incremental steps, and only when information and market action continue to confirm our views. I think you'll agree that this is a more conservative management style than market timing strategies, and even more conservative than many asset allocation strategies.
Q: How is PVG Asset Management organized?
A: As I mentioned, we have four portfolio managers. We work together studying markets and securities, but we try not to think of ourselves as a committee. We don't have formal morning meetings. We all are senior managers. We work as a team. We discuss ideas, mistakes, and successes all day long. We are a pretty open group and we complement each other with our individual strengths. The other professionals in the office focus on operations, client service, and marketing. Our portfolio managers can concentrate more completely on client investment needs.
Q: Joe, given your unique approach, how should our readers measure PVG's performance?
A: There is currently no single market index against which to measure our performance. We have been using the Lipper Balanced Index as our Multiple Market benchmark. We use the S&P Mid-Cap index for Mid Cap accounts. However, because of our broad diversification we tend to have consistently better risk adjusted returns and less spectacular "total" return compared to these indexes. This can mislead potential clients about our performance, positively and negatively, in any quarter. Many investors assume a manager will have near the same level of risk as the comparative index. Results are measured by the managers' ability to squeeze that extra percentage of return. With Multiple Market accounts, our conceptual benchmark demonstrates how well we stack up relative to a large broadly diversified pension funds. We are managing smaller accounts in a very similar manner.
Q: What is Bill Rahmig's and your investment background?
A: Bill Rahmig began his career in 1961 as an analyst with the Dreyfus organization. Two years later he left to join the Madison Fund; a closed end fund listed on the NYSE. He spent 18 years at Madison where he progressed from analyst to Executive Vice President, responsible for research and administration as well as portfolio management. He moved to Colorado , first as a portfolio manager for Stephenson & Co. Then he built his own counseling firm, High Country Investors, before joining me at PVG. I earned my BS and MS in Economics in California in 1969. I went to work for Security Pacific National Bank in Los Angeles as an analyst. Later, after two years as a sell side analyst covering technology stocks for a major London based investment bank called Joseph Sebags, I joined a client, Oppenheimer Asset Management in Denver. I managed a couple of mutual funds and sat on their investment committee. In 1981 Oppenheimer moved fund management to New York. I bought into Denver based Alpine Capital Management. I sold my interest in this firm to my partners after we grew the company to over a half billion dollars under management. PVG followed.
Q: What do you see as the most overriding influences on the investment markets of the 1990's, and how do you plan to take advantage of them?
A: Global disinflation and the possibility of deflation in the industrialized democracies are currently our biggest problems because of the economic excesses of the last 40 years. The rapid growth of many Latin, Asian, and former Communist nations. These trends, along with the spread of low cost communications and the application of other technologies to the manufacturing and service industries, are already leading to a very uncertain investment environment. Fallout from political, social, economic, and business changes will be hard to predict. No longer can we just take investment cues from the four year US business cycle, depend upon a five year computer product cycle, or look for undervalued stocks without a much more serious study of a company's viability. But this rapid change and uncertainty, and the much larger global market, are providing many more investment opportunities than we have had in years. We continue to expand our research globally into narrow investment markets. We are looking at changing social and political attitudes for clues to new business trends and investment opportunities. We are spending more time determining which corporate managements seem better able to understand and profit from the global changes now occurring. Most importantly, we are not limiting our clients' portfolios to any single market or market segment, and we are actively making changes as needed. Our portfolios are changing with the world.