(or, What Do the NCAA Tourney and Portfolio Management Have in Common?)
Greg McConahey, Trust Investment Committee
The men’s NCAA basketball tournament is one of the great spectacles in sports. Every game can provide fans with an incredible finish. First round games, however, not only can provide incredible finishes but the many unexpected outcomes elevate the excitement and emotional response from the fans and have great impact on their brackets. This year’s tournament has not disappointed. First round upsets by Hawaii, S.F. Austin, Arkansas Little Rock, Middle Tennessee State, Yale and Northern Iowa were unforeseen by all fans and wreaked havoc on everyoneís bracket.
The first quarter of 2016 has offered investors many unexpected developments such as the weakness in the U.S. dollar, rebounding oil and metals prices, heightened European banking concerns and strength in many emerging markets. The S&P 500 has boomeranged from down 11% in the first five weeks to bouncing back over 13% in the next 5 plus weeks.
Reviewing the results of the NCAA tournament from a longer-term perspective yields somewhat more consistent outcomes. There are approximately 350 schools playing Division I basketball. In the last 15 tournaments, only 32 schools were represented amongst the 60 final four participants; led by Michigan State with 5 appearances and Duke, UConn, Kansas, and Kentucky with 4. The first 3 schools experienced this success over the course of the 15 years whereas Kentucky accomplished everything in the last 5 years, driven by a coaching change. The last 15 titles were captured by 10 schools, with UConn winning three titles and Duke, North Carolina and Florida winning two apiece. Great coaching, recruiting superior talent, discipline to consistently execute a game plan, and certainly a little luck play a role in these schoolsí abilities to sustain these superior finishes over many years.
After gaining a thorough understanding of our client’s goals, risk tolerances, time frame and liquidity needs, we construct a portfolio with an asset allocation consistent with the client’s characteristics. We look at a universe of approximately 250 fiduciary quality companies and reduce that down to roughly 80 names approved for purchase. Ultimately, 30 to 35 companies are purchased to meet a client’s goals. When we select companies for the equity portion, we are looking at a companyís value relative to their earnings, revenue and cash flow. The quality and consistency of a company’s earnings, as well as return on equity and operating margin are reviewed. In short, we strive to populate the portfolio with companies that have reasonable valuations relative to the overall market, their industry group and the company’s historical averages.
These numbers are a byproduct of a CEOís strategic vision and execution of the supporting business plan, the magnitude and sustainability of the company’s competitive advantages and its ability to adapt to a changing market for its products and services. One of our widely held, long-term holdings is Walt Disney Co. Since 2005, under CEO Robert Iger, Disney has ramped up returns from its studio division with acquisitions of Pixar, Marvel and Lucas film. The Disney brand is continually leveraged across film, theme parks and merchandise to sustain revenue. Another widely held, long-term holding is Accenture PLC. Accenture is a global provider of management consulting, technology services and outsourcing. A recent count indicated 80% of the Fortune Global 500 companies work with Accenture. The company’s ability to stay ahead of trends impacting businesses has allowed it to deliver efficiency improvements, value and growth solutions to its clients. In turn, Accenture has sustained a long term relationship with its clients.
Disney and Accenture are worthy final four and champion contenders in any annual corporate tournament and have been wonderful long-term holdings in our portfolios. While we can’t help you with your brackets, we are always happy to discuss your portfolio and how it serves your short and long-term financial goals.