Investment Philosophy
Westchester Capital practices a value-oriented investment philosophy. It is the firm's belief, and history has shown, that this style provides superior returns with less volatility over considerable periods of time. With the value discipline, Westchester Capital looks for stocks and bonds that it believes are undervalued in the marketplace. Westchester Capital also requires that these assets generate enough excess return to compensate for the amount of risk introduced into an investment portfolio. Westchester Capital believes that strategic investment decisions should be evaluated in terms of a three to five-year time horizon.
The firm also believes that diversification is of utmost importance. When fully invested, an equity portfolio should have approximately 20 to 25 different positions. This strategy minimizes company-specific risk. Westchester Capital looks for value across all market capitalizations, while factoring in liquidity. In addition to factoring in stock diversification, WCM closely monitors its portfolios' sector weightings. This strategy helps to minimize industry risk and helps with the consideration of macro-economic factors. For fixed-income securities, Westchester Capital diversifies across issuers and maturities in order to better ensure overall stability. Investment grade issues are almost always selected given the firm's value discipline and conservative nature.
Investment Process
Westchester Capital has made substantial investments in computer and information systems including proprietary models for monitoring and valuing equities. While the firm is proud of these investments, it recognizes there is no substitute for sound business judgment when evaluating investments.
Equities: Through extensive reading, attending research conferences, and Investment Committee discussions, Westchester Capital identifies investments that may be suitable for further analysis. As investors, rather than speculators, Westchester Capital believes that a business-oriented approach to buying equities is appropriate. The firm is inclined to invest in companies--not in market indices. For Westchester Capital to consider investing in a common stock, two criteria must be met. First, the company must be a strong participant in a foreseeable business. Second, the stock must be selling at a discount to what Westchester Capital calculates the fair value (intrinsic value) to be. While Westchester Capital understands industry and economic conditions affect any firm's financial results, Westchester Capital is more interested in how the fundamentals of a business impact its market valuation. Once a suitable stock is found, limits are established. These dynamic limits are based on each company's profitability and its valuation relative to the industry and overall market. After candidates are established, Westchester Capital evaluates the potential investments to determine if they meet even more specific criteria. It is the firm's management experience that significant analysis is needed to come up with suitable investments. An idea that passes the numerous tests is then considered for portfolio inclusion based upon each client's goals.
Fixed Income: Westchester Capital also exercises care in the bond selection process. Stability of principal is paramount; therefore, the firm focuses on high quality, short to intermediate term issues. Westchester Capital continually monitors the fixed income markets, searching for instruments that meet its investment parameters, which are determined by each client's profile and events of the market. When suitable issues are found, Westchester Capital negotiates the purchase of a large block of securities, often receiving substantial discounts. For most portfolios, Westchester Capital employs a laddering technique that spreads cash flows across several maturities, allowing the firm to effectively manage interest rate risk.
Performance
Each of Westchester Capital's clients' accounts is managed with different objectives, focusing on the individual's needs, income levels and risk parameters, which are identified through on-going communications with the WCM staff. Due to the differences in client risk profiles and asset allocation, returns may vary from client to client. As such, WCM does not calculate an "overall" performance number; rather, each account's performance is calculated independently and discussed with each client through individual meetings.
