In selecting equity securities for the Peak Resources & Energy (PREP) Portfolio, LCM starts by reviewing U.S. and foreign companies engaged in the natural resources industry, including those listed on the S&P Global Energy indices or the S&P Alternative Energy indices, the Philadelphia Gold & Silver Index, energy and natural resources sector ETFs and ETNs, ETFs and ETNs linked to commodities such as gold, silver, oil or agricultural products, or a commodity index; and companies engaged in alternative energy or conservation-related activities. This universe of over 1,000 companies is screened for market capitalization greater than $250 million, a projected Price/Earnings to Growth (“PEG”) ratio less than the S&P 500 Index, and a high free-cash-flow yield.
Upon the Investment Committee's discretion, LCM will select companies that do not meet the screening requirement. For example, LCM may invest in junior miners that own significant precious metals assets that it judges to have above-market growth potential. Due to the nature of small companies, they may not meet some or all of the aforementioned requirements.
The PEG is an indicator of a stock’s potential value. A lower PEG means the stock is more undervalued. The Adviser further reduces the resulting watch list of approximately 50 to 75 companies, using a rigorous fundamental research process described below to select about 30-40 equity securities for the portfolio. However, the Portfolio Managers have the discretion to select stocks that we believe offer extraordinary potential upside even if they do not meet one or more of the cited criteria. The Adviser’s analysis focuses on the following factors:
Dominant & Competitive Analysis Growth Factors Company & Quality Analysis
Once investments are identified, the portfolio is constructed under general weighting guidelines. These include but are not limited to:
LCM may invest in ETFs or ETNs linked to commodities such as gold, silver, oil, agricultural products, or a commodity index. A typical commodity-related ETF or ETN may seek economic exposure to commodity prices through direct investment in a commodity, such as gold bullion, or by investing in the securities of issuers primarily engaged in the production of specific commodities. The Adviser’s research suggests that commodity-related investments offer the potential for inflation protection, capital appreciation, and returns that are not highly correlated to equity markets. In a typical commodity-related ETF or ETN, the net asset value of the ETF is linked to the value of an individual commodity or the performance of commodity indices. Commodity ETFs and ETNs may use derivatives that expose them to further risks, including counterparty risk (i.e., the risk that the institution on the other side of the trade will default).
LCM may sell portfolio securities if our Portfolio Managers have determined specific securities have become over-priced or have suffered price depreciation. In this event, the securities sold can be advantageously replaced with other securities that offer a better risk/reward opportunity. Lastly, a security may be sold if changes affect a company’s fundamentals, making future growth prospects appear weak.
From time to time, our Portfolio Managers may take temporary defensive positions inconsistent with the portfolio’s principal investment strategies to respond to adverse market, economic, political, or other conditions. For example, portfolios may hold cash, money market mutual funds, investment grade short-term money market instruments, U.S. Government and agency securities (including zero coupon bonds), commercial paper, certificates of deposit, repurchase agreements, and other cash equivalents.
In addition to its three active investment strategies, LCM manages a limited number of advisory client accounts mainly invested in mutual funds. LCM designs this mutual fund strategy based on its screening process utilizing Morningstar data when selecting funds; portfolio composition is based on target sector weights according to LCM’s philosophy and client objectives. The mutual fund portfolios may be constructed with no-load funds, front-end load funds, back-end load funds, or contingent-deferred load funds. Such load fees, if any, are paid from the client’s accounts in addition to LCM’s advisory fees. Additionally, managers of mutual funds charge management fees that are exclusive of those set by LCM to its clients.