Your Money: Firm's tips on developing a sell discipline

Posted: September 06, 2012

We all do it: We don't sell a stock when we should, even after the share price has hit our hoped-for target, or it has lost value and stayed low. We fall in love with our portfolio holdings.

Professionals offer tips on how to sell as a discipline. We checked in with the folks running Logan Capital Management's Concentrated Value portfolio day to day.

Marvin Kline and Rich Buchwald, managing directors at the $2 billion Ardmore money-management firm, are Penn alums (one undergrad, one grad school), and they rebalance the portfolio every December and June under a strict discipline.

They sell a stock they hold in the 12-stock portfolio when it no longer qualifies for the reasons they bought it - those qualifications being a large cap ($25 billion or so) and financial stability with the highest dividend yields available. Among the top holdings currently are General Electric, Philip Morris, Procter & Gamble, DuPont, and Chevron, each 10 percent of the portfolio. They also own Big Pharma - Merck, Pfizer, Johnson & Johnson, and GlaxoSmithKline - but limit each of those to 5 percent of the portfolio.

In an interview, Buchwald explained that the portfolio typically has dividend yields equaling twice that of the Standard & Poor's 500 benchmark index, or about 4 percent. Their fund recently sold Kimberly Clark stock and swapped it out of the portfolio with Procter & Gamble.

P&G is the world's second-largest consumer-products company, whose best-known brands include Tide, Bounty, Crest, Folgers, Charmin, Downy, Head & Shoulders, Gillette, and Duracell. Emerging markets account for 34 percent of total sales, while North America and Europe account for about 40 percent and 20 percent, respectively.

The Kimberly Clark position, initiated in June 2008, had a total return of about 60 percent compared with a roughly 6 percent total return for the Russell 1000 Value Index over the same period.

"While Kimberly did not always provide a smooth ride, it was a profitable one," Buchwald said, "where patience and discipline were rewarded."

When they made the switch in June, Kimberly was selling near its all-time high, while P&G was selling near its lowest levels of the last six years, with the exception of the 2009 bear market. Though there are similarities between these two companies, historically, P&G has been considered higher quality, both in profitability and management, and often sold at a premium to most consumer-staple companies.

When the tables turned, Buchwald and Kline bought P&G and sold Kimberly Clark.

"We bought P&G just before [Bill] Ackman at Pershing Square started buying it, too. We were happy to see activists come in" during July to buy a P&G equity stake, said Buchwald, although activism is not Logan Capital's mandate. Ackman runs a $10 billion hedge fund that specializes in buying significant stakes and then advocating for change at top management or in corporate strategy to boost the stock price.

"When we buy something, we have to sell," he said. "We had owned Kimberly Clark for several years ... but that is our sell discipline."

The same goes for the international fund they run. In the second-quarter 2012 client letter, the portfolio managers explained their changes: selling Banco Santander, one of the world's largest banks but domiciled in Spain, with strong capital ratios and more than two-thirds of its business outside of Spain and continental Europe.

"The bank will be a survivor. Although we still believe that Santander will survive the [ongoing Eurozone] crisis in fairly good shape, the immediate visibility in terms of its dividend-paying capacity has become less clear, and we, therefore, decided to sell the stock."

For their new purchase, the money managers swapped into Canadian banks. Bloomberg recently ranked Canadian Imperial Bank the third-strongest bank in the world. Royal Bank of Canada, which they also own in the international fund, last week unexpectedly raised its dividend 5 percent, to 60 cents a share.

At the time of purchase, Canadian Imperial had a dividend yield of 5 percent and was selling at nine times earnings.

"The one shortcoming of the Canadian banks, in general, is the future growth rate for earnings is expected to be only mid-single digits," the portfolio managers said. "However, we believe that low expectations are fully reflected in the price."


Erin Arvedlund is a finance reporter and a resident of Philadelphia. Contact her at erinarvedlund@yahoo.com or 646-797-0759.

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