Investment Policy Statement

Transparency is of paramount importance to building successful, trusted, long-term client relationships. At Buckley Financial Planning, we consider clearly outlining our general investment and analysis methodology to be a high priority.  Our strategy begins with building fully customized portfolios that are centered around a client’s long-term financial plan.  Each custom portfolio will have a common goal of rising and sustainable income through the use of dividend-oriented stocks and fixed income investments.  Our core belief is that company profitability is the backbone of a successful investment.

 

Our Methodology

We aim to invest in companies with a sound and profitable business strategy, that satisfy our fundamental analysis and that meet the requirements of our stress test.

Company business strategy is a key driver of our investment research. We want a business strategy that makes sense, is easy to understand, is profitable, and follows trends we believe are taking place in our current and future environment.

Our firm maintains an in-house investment committee that conducts our fundamental and market research. Our investment committee which meets biweekly, or when necessary, leads the way for our firm’s economic outlook and investment analysis, along with the continual monitoring and stress testing of client portfolios.

The investment committee discusses any major market, economic or political event(s) that have taken place here in the U.S. and globally. These discussions affect our outlook and investments. They may bring about new opportunities, or cause us to take pause, review and possibly amend or completely exit a position. After discussing recent events, our investment committee reviews our investment holdings report. Going through our top holdings, they discuss heavily researched views and outlooks for each position which may lead to amendments in our investment recommendation.

Additionally, our investment committee generates research reports for our top international mutual funds. This report provides an in-depth analysis and outlook for the top ten holdings of these select funds. We recognize the importance of knowing what you own, and we make an exceptional effort to keep our clients just as informed.

In addition to our in-house review and reporting, Buckley Financial Planning utilizes a variety of independent stock analysis reports.  These reports come from, but are not limited to, Fidelity, Thomson Reuters, Ford Equity Research, *Morningstar. Additionally, we may review and analyze company specific reports such as the 10-Q and 10-K.

When it comes to company specific fundamentals, we analyze various metrics and ratios to evaluate the company’s financial health and future success. Some of these metrics and ratios are described in detail below.

Revenue, or sales, is how the company makes its money. We analyze how they make money, where the money comes from, as well as how the company is growing or plans to grow their revenue.

Gross Margin measures the company’s revenue after cost of goods sold. The higher the gross margin, the more capital a company retains on each dollar of sales, which can then be used to pay other costs or satisfy debt obligations. We look for companies with sustainable or rising gross margins. For example, we wouldn’t want to see a company that sells a widget for $1 that costs $2 to make.

Operating Margin measures how much profit a company makes per dollar of sales after paying variable costs such as wages and raw materials. It is also a good indicator of how well the company is being managed or other related risks. If a company’s operating margin is increasing, it is earning more per dollar of sales. We look for companies with sustainable or rising operating margin.

Earnings Per Share (EPS) indicates how much money a company makes for each share of its stock. A higher EPS indicates greater value because investors will pay more for a company’s shares if they think the company has higher profits relative to its share price.

Dividends are a distribution of profit to the shareholder.  Dividends also display company confidence, a sustainable business model, earnings quality, stewardship and financial health. We identify companies which display organic, historical growth of their dividend.

Shares Outstanding refer to a company’s stock held by all its shareholders, including shares held by institutional investors and restricted shares held by the company’s officer and insiders. Increasing shares outstanding dilutes shareholder value and show signs of inorganic company growth. We look for companies with steady or decreasing shares outstanding.

Payout Ratio is the proportion of earnings a company pays its shareholders in the form of a dividend. A low payout ratio can indicate the company is reinvesting the bulk of its earnings into expanding operations. A payout ratio over 100% indicates the company is paying out more in dividends than its earning can support, which we view as an unsustainable practice.

Debt Obligations refer to the company borrowing money by either issuing debt in the form of bonds, or by taking a loan with a bank or lending institution. It’s important to know what the debt is for – to repay or refinance old debt or for new projects that have the potential to increase revenue. We look for companies with low, sustainable debt.

Free Cash Flow (FCF) reflects cash that the company can safely invest or distribute to shareholders. A company with consistently low or negative FCF might be forced into costly rounds of fundraising in an effort to remain solvent. Similarly, if a company has enough FCF to maintain its current operations, but not enough FCF to invest in growing its business, that company might eventually fall behind its competitors. For yield-oriented investors, FCF is also important for understanding the sustainability of a company’s dividend payments, as well as the likelihood of a company raising their dividends in the future.

Management Stewardship analyzes who is running the company and how well they are performing. Company profitability stems from executive leadership. Strong leadership comes from years of experience, clear vision and a focus on expanding a company’s fundamentals. We often follow executive pay relative to company performance. This can weed out businesses that may be run for the benefit of upper management and not the shareholders.

For each company, we run its financials through a rigorous stress test. The purpose of the stress test is to see which companies can sustain their dividend in the event of economic turmoil. We cut the company’s revenue by an estimated percentage to see if their newly estimated revenue, along with their current cash position, is sustainable to pay their current dividend. We stress test our top 100 investments and amend our stress estimates on a semiannual basis.

Let’s look at an example using Apple. As an extreme, let’s say there are rumors that China (18% of Apple’s revenue) may no longer do business with Apple. We would want to see how this may affect Apple’s profitability and their ability to pay a dividend. In the first half of 2020, Apple made $118.01 billion in revenue with a cost of goods sold of 62% and an operating cost of $19.11 billion. We would begin by discounting their revenue by 18%. We could also discount their operating costs by 18% since they will no longer be making iPhones for China, but let’s assume they find an alternative to China and only drop their operating costs by 10%. We would see Apple’s net profit drop from $25.73 billion to $19.57 billion. Additionally, they had $33.38 billion in cash and short-term investments, and a dividend expense of $7.04 billion. While losing China as a customer may cause room for pause, based on our stress test we would not be concerned about Apple’s ability to continue paying their dividend. We may also look at a company’s interest expense, but in the case of Apple they have a net interest income, which only helps their ability to pay their dividend. Of course, this is a hypothetical example and is for illustrative purposes only.

We have created and implemented a cohesive investment research methodology that we believe will add comfort to our investors knowing their money is being well looked after.

 

Our Analysis

Equity Analysis

We believe that direct stock (equity) ownership is an essential part of building long-term wealth. Stocks provide a way for companies to raise capital by offering a piece of ownership to the general public.  Companies use this capital to grow their business and profitability.  When a company is growing their profit, this may increase the price of the stock, allowing them to buy back shares from the market and pay dividends. We focus on determining the value of a business, the risks involved and whether the price accurately reflects the value of future cash flows and the potential disruptions to those cash flows.

Within a portfolio, equities play several beneficial roles. These roles include price appreciation, dividend income, diversification and the potential to hedge against inflation. In general, equities tend to outperform other major asset classes in periods of strong economic growth and underperform in periods of weak economic growth.

Portfolio diversification using stocks can occur through using companies that have different market sectors, position sizes, market capitalization, locations, and dividend yields.  Along with diversifying each client’s custom portfolio, Buckley Financial Planning believes that it is important to strike the right balance between stocks that provide greater income now (high dividend yield) and stocks that provide greater return through price appreciation (high growth stocks).

Dividend Analysis

Dividends comprise an important component on historical total return.  Buckley Financial Planning sees this as a basis for a stock’s long-term valuation. We search for top quality businesses that have a strong history and commitment to dividends. Our goal is to identify these companies that have organically grown their dividend. This means that the company has been able to sustain and grow their dividends through increasing revenue, maintaining margins, and generating more profit.

Directly receiving profit from dividends provides freedom for the investor to reasonably account for annual income or reinvestment.  There is also some downside protection in that your portfolio will create greater consistency over time when dividends continue regardless of share price.

Growth Analysis

Growth stocks are known for generating revenue, cash flow or profits faster than the industry average. They reinvest their earnings into the business, as opposed to distributing dividends to shareholders, to expand their products or services to generate more revenue. They can be a great way to provide investors with a potentially high return, given the investor has the time horizon and appetite for risk.

We aim to invest in select growth stocks with the products or services we believe are disruptive to the status quo. It’s important to find these products and services that have a large target market and solid growth trajectory within the market. We look for companies that have strong leadership with a good track record and reputation for being innovative. Diving into company fundamentals, we want companies that are seeing acceleration in earnings and revenue growth for consecutive quarters.

International Analysis

By investing globally, portfolios can become more diversified which can enhance returns and reduce portfolio risk. International investing provides investors with a broader investment universe for selecting investments. In some cases, it can also help mitigate some systematic risks associated with specific country’s economies. Along with these added benefits, there are important risks to consider. International investing opens up investors to significant political, economic and geopolitical risk. Investors will also be exposed to foreign exchange risk, as most countries report their finances in their home currency.

When investing in individual foreign securities we follow our analysis described above depending on whether or not this foreign investment is a growth or high yield opportunity. Another common way we may integrate international investments into client portfolios is through the use of ETFs and mutual funds. In this case, we do an in-depth review into the fund manager regarding their tenure and track record. We will also review the fund’s investment methodology and how well the fund has followed that methodology. We evaluate industry risk measures such as the Sharpe Ratio and Standard Deviation, as seen later on. The last, and in some cases, most important part of international investing is staying on top of political and economic news and events across the globe. We utilize a variety of resources to stay up to date and ahead of global economics.

Fixed Income Analysis

Fixed Income is the largest segment of world financial markets. Fixed income, or bonds, can come in many different forms. There are corporate bonds, which are issued by private and public corporations. Municipal bonds are issued by states, cities, counties and other government entities. U.S. Treasuries are issued by the U.S. department of Treasury on behalf of the federal government. Additionally, bonds vary by credit, maturity, coupons, callability and many other features. It’s important to understand the different types and uses of fixed income investments and how they may play a role in an investor’s portfolio.

A Corporate bond is a debt obligation that a company issues that has a fixed stated interest rate (called the coupon) and specific date (called maturity) when the face value of the bond will be returned to the investor. Bonds can contribute well to an investor’s portfolio by providing diversification, stable income and preservation of capital. Although dividends may fluctuate, bond interest should remain the same, providing additional predictable cash flow.  Bonds have a fixed maturity date when the company will return the face value to the bond holder.  This can provide additional stability to a portfolio during volatile economic and market cycles.

One bond strategy that we may utilize is known as bond laddering. Bond laddering involves buying numerous bonds with differing maturity dates. This strategy allows an investor to increase the opportunity of making money in a rising interest rate environment (short-term bonds will mature sooner allowing the investor to reinvest at higher rates). When interest rates are low, the longer-term bonds should continue to provide higher rates of return. Bond laddering allows an investor to be able to respond quickly to changes in interest rates and reduces the reinvestment risk associated with rolling over maturing bonds into similar fixed income products all at once.

Analyzing a bond begins by reviewing the balance sheet and cash flow of the underlying company.  It is important for us to personally analyze the credit quality of the bond to determine if we believe the bond will continue to pay interest and return the face value upon maturity.  We also review credit quality reports and analysis from the 3 major credit agencies: Moody’s, Standard and Poor’s, and Fitch.

 

Our Measurement

All investment return will be measured using Time-Weighted Return (Geometric mean). We believe that the TWR methodology best represents the true performance of your portfolio because it solely reflects the effects of the market and the investment choices made for you. Unlike your standard rate of return, time-weighted return does not factor in deposits or withdrawals which can skew your return calculation. To better understand your return estimate, let’s review the below example.

Investor A invests $1 million into their Portfolio on January 1st. On July 1st, their portfolio is valued at $1,162,484. At that point (July 1st), they add $100,000 to their Portfolio, bringing the total value to $1,262,484. By the end of the year, the portfolio has decreased in value to $1,192,328.

The holding-period return for the first period, from January 1 to July 1 would be calculated as:

Return = ($1,162,484 – $1,000,000) / $1,000,000 = 16.25%

The holding-period return for the second period, from July 1 to December 31, would be calculated as:

Return = ($1,192,328 – ($1,162,484 + $100,000)) / ($1,162,484 + $100,000) =

-5.56%

The second sub-period is created following the $100,000 deposit so that the rate of return is calculated reflecting that deposit with its new starting balance of $1,262,484 or ($1,162,484 + $100,000).

The time-weighted return for the two time periods is calculated by multiplying each subperiod’s rate of return by each other. The first period is the period leading up to the deposit, and the second period is after the $100,000 deposit.

Time-weighted return = (1 + 16.25%) x (1 + (-5.56%)) – 1 = 9.79%

Now that we have determined the time-weighted rate of return, lets compare it to the inaccurate, but more commonly used rate of return. Rate of return is calculated by taking the ending value – beginning value and dividing that by the beginning value.

Rate of return = ($1,192,328 – 1,000,000) / $1,000,000 = 19.23%

As you can see, the rate of return provides a return that is more than double what the time-weighted rate of return provided. It’s important to understand the difference, as many times investors are fooled to believe their investment manager has provided these superior returns when, in fact, more than half of their return came from the investor depositing more money into their account.

 

Risk Measurement

We believe it is crucial to understand and manage the risks that a portfolio may be exposed to. It’s imperative that we strike the right balance of risk adjusted return for each individual portfolio. Through the use of our quarterly reports, you will see a common theme of various metrics we use to hold ourselves accountable to the health and well-being of your portfolio. Proper management of these metrics through rational decision making under all types of market conditions and scenario planning increases the probability of generating strong, long run results. Some of these metrics you’ll hear us discuss when evaluating your portfolio are listed below.

Standard Deviation measures the level of volatility, or risk, of a portfolio using historical returns. When compared to a benchmark, a lower standard deviation implies a less volatile, or risky portfolio.

Mean represents the annualized geometric return. We use geometric mean as it takes into account the compounding that occurs from period to period, whereas arithmetic mean does not.

Sharpe Ratio is a measure of how much return you’re getting for each unit of risk taken.

The higher your portfolio’s Sharpe ratio, the better its returns have been relative to the amount of risk it has taken. The Sharpe Ratio for the S&P 500 over the past 25 years is 1 (.55 over the past 10 years). We aim to achieve a Sharpe ratio greater than 1.

Alpha is the measure above or below what your portfolio returned vs. what your benchmark returned. An alpha of 4 indicates we generated a return that was 4% higher than your benchmark. In short, we use alpha to test our aptitude to invest your money appropriately.

Beta is a useful measurement to see how your portfolio will move compared to your benchmark. A Beta of 1 means you can expect the same volatility as your benchmark. A Beta higher (lower) than 1 means you can expect larger (lower) swings, or volatility, in your portfolio. Typically, risk averse investors prefer a beta of less than 1.

R-Squared shows the correlation that exists between the performance of your portfolio and that of your benchmark and is measured on a scale of 1 – 100. The higher the value, the more your portfolio’s performance pattern can be explained by the performance of your benchmark. This helps us evaluate the relative performance of your portfolio and predict how the portfolio may perform in the future when compared against your benchmark. We aim to achieve an R-squared between 80-100. Additionally, we typically use R-squared and Beta together as a higher R-squared value will indicate a more useful Beta figure. Meaning, if your portfolio has an R-squared close to 100 with a Beta below 1, this indicates that you are likely receiving a higher risk-adjusted-return.

Price-to-earnings ratio (P/E) measures a company’s current share price relative to its per-share earnings. In essence, it indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. It is a popular tool that analysts use in determining if a company’s stock is overvalued or undervalued.  In general, a high P/E could suggest that investors are expecting higher earnings growth in the future compared to companies with a lower P/E or that the company is currently overvalued. A low P/E can indicate either that a company may currently be undervalued or that the low P/E is justified due to deteriorating fundamentals. Your portfolio’s P/E is the average P/E of all your investments and can be interpreted similar to how you would interpret company specific P/E. We aim to maintain a P/E that is in line with your benchmark P/E.

Price-to-book ratio (P/B) The book value of a company is the net difference between the company’s total assets and total liabilities, where book value reflects the value of a company’s assets that shareholders of the company would receive if the company were to be liquidated. Price-to-book measures the market’s valuation of a company relative to its book value. P/B ratio provides a valuable reality check for investors seeking growth at a reasonable price. Relative to its peers, a company with a higher (lower) P/B can be viewed as overvalued (undervalued). Your portfolios P/B is the average P/B of all your investments and can be interpreted similar to how you would interpret company specific P/B. We aim to maintain a P/B that is in line with your benchmark P/B.

Price-to-cash flow (P/CF) measures how much cash a company generates relative to its stock price. P/CF is a popular indicator as it provides us with a less distorted picture of the company’s financial standing. It also helps investors understand how much additional they are paying per dollar of cash flow. While it depends on industry average, investors tend to view a higher (lower) P/CF ratio as overvalued (undervalued). Your portfolio’s P/CF is the average P/CF of all your investments and can be interpreted similar to how you would interpret company specific P/CF. We aim to maintain a P/CF that is in line with your benchmark P/CF.

 

Our Process

As wealth planning advisors, we know that the management of our clients’ money is extremely important to them. But we also know that it’s not everything. Money has purpose. And that purpose is as unique as each of our clients. It’s our job to partner with individuals and families to determine what their money should be for. To do that, we take a holistic approach to everyone’s unique financial strategy and determine what they want their life to be—not just where their money should go.

Although financial markets are mind-bendingly complex and the whole industry landscape can shift dramatically between the opening and closing bells on any given day, our process is simple. When meeting with new potential clients, we start with a phone call or email to answer any preliminary questions. If it seems like our services would be a good fit, we will schedule a meeting with one of our lead advisors. Before the scheduled meeting, the prospective client will need to fill out and send back our Confidential Financial Questionnaire. We require this form because we want to learn two things: their current information and their story. The numbers are crucial for obvious reasons, but every number has a story behind it. And those stories are what will shape the strategy we’ll present to them. Next, we take all the information provided to us and begin our planning process.  We review and analyze their current tax situation and budget. We determine if any insurance or estate planning is needed and collaborate with our respected partners to provide the best possible options available. Using our retirement planning software, we will do an in-depth analysis on the prospective client’s current retirement path. We will also use this software to show how they can meet not only their retirement goals, but other personal goals.  Then we meet and go over our recommendations in detail. This custom strategy will take all the information that’s been provided and combined with our in-depth research, will serve as the game plan moving forward if they chose to partner with us. If it’s a good fit for both of us, here’s where the real fun begins! We implement their custom financial strategy and monitor it going forward. We’ll set up quarterly status calls along with semi-annual full review sessions. And if we are needed between those scheduled updates? We’re just a phone call or email away, and we promise to get back within one business day.

Financial markets are inherently complicated. Fortunately, our passion is to guide you through these complications toward the life you’ve always wanted. We make it a top priority to educate everyone we meet with on the nuances that come with financial planning. Not only are we educational in nature, but we are sound listeners. Every individual goes through numerous life changing events, whether they are financial in nature or not. We open up our team to all our clients to be a sounding board and guide for whatever life throws at them. Our goal is your peace of mind. Our mission is your freedom. Our passion is guiding you toward the life you’ve always wanted—no matter what that life might look like for you individually!

 

This communication is strictly intended for individuals residing in the states of AL, AZ, CA, FL, GA, ID, IL, IN, KS, KY, LA, MD, MA, MI, MO, NJ, NC, OH, OK, PA, SC, TN, VA, WA. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

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