Our Investment Philosophy

Our investment philosophy is straightforward. We seek the preservation and growth of capital through good and bad markets. Our experience shows that a balance of value stocks, growth stocks and investment-grade bonds is the best allocation of assets. Stocks tend to appreciate over time while bonds generate income and limit risk. Such an all-weather discipline holds value in down markets and participates in up markets.

The firm provides core investment advisory services for institutions and individuals whose portfolios are not large enough to hire multiple money managers representing multiple styles (such as value, growth, contrarian). Clients depend on O’Brien Greene & Co. to provide a reasonable return in good markets and bad markets; thus relative return (return as measured against an index) is important but absolute positive performance tends to be more important for clients. That is to say, clients want to preserve principal and see inflation-adjusted growth so as to ensure that purchasing power is maintained, but they do not want to risk big short-term losses in order to outperform a hot stock market index.

With this goal in mind, the firm uses a blend of growth and value stocks and investment-grade bonds in all institutional accounts. This is the all-weather diversification system. The firm will purchase so-called growth stocks but is not a momentum investor, that is, one who buys stocks that are going up because they are going up. The firm believes that notions of value and growth come in and out of fashion. The investor who avoids the extremes of growth and value for the middle way can reduce overall risk while participating in the best features of each stock class. Thus O’Brien Greene is a risk-adjusted investor. Equity turnover is low at 25 to 30% a year. Unless an industry or company fundamental has changed, the firm prefers not to sell a stock. The firm typically owns thirty stocks diversified across the economy.

As for bonds, the firm uses only investment grade bonds deemed suitable for a municipality or a bank trust department. It does not use derivative securities. Different bond classes (corporate, Treasury, government agency, mortgage-backed) come in and out of fashion. On the basis of what is currently attractive, and not on the basis of economic forecasts, the firm puts money into a bond class from short to long term.

Combination of Growth and Value Stocks

We balance our client’s stockholdings between value stocks and consistent high growth stocks. We are attracted to value stocks because they have dividends that are secure even in the face of unexpected adversities, dividend growth rates that far exceed inflation and less price volatility in down markets.

We are attracted to growth companies because their products tend to be in demand even during periods of economic decline, and because their stock prices tend to outperform the stock indices in up markets. The combination of growth and value produces stock portfolios that over time generate both constantly increasing dividend streams and steady capital appreciation. Stocks are selected through our in-house security analysis.

The Allocation Between Stocks and Bonds

We compare the current ratio of stock earnings to corporate bond yields with the historical record of that ratio over the last sixty years. This comparison informs our judgment that stocks are a better value than bonds, or vice versa. This discipline relies on reported historical relationships and not forecasts. We also consider a client’s tax, legal and income requirements in recommending an appropriate allocation.

Why No Mutual Funds at O’Brien Greene & Co.?

Over the past 40 years O’Brien Greene & Co. has not used stock and bond mutual funds in its client portfolios. Instead we have relied on individual stocks and individual bonds to generate income for clients, preserve the purchasing power of their savings from inflation, and make their capital grow over time. Mutual funds are good at diversifying relatively small amounts of money in the pursuit of these objectives, but for sums large enough to achieve diversification on their own, the drawbacks of mutual funds exceed their benefits, in our opinion.

One big drawback is complexity. There are thousands of stock and bond mutual funds; indeed, there are more mutual funds than there are individual stocks and bonds. The internal workings of each mutual fund is different, and the devil is in those details. While fund prospectuses are supposed to disclose the fees, penalties, charges and risks of each fund, the prospectuses are long and hard to understand, even for professionals in the business.

There are other issues to consider once you own a mutual fund: Is the fund sticking to its original investment strategy? What is its exposure to foreign currencies? Does it use leverage to supplement income or price volatility? Has the mutual fund been sold to another mutual fund company? Has its management changed in other ways, for instance, as key personnel have left? Is it under federal investigation for misconduct? It may not be possible to answer all these questions from the prospectuses, and even if it is, the answers change over time. We think the time and effort are more productively spent on the analysis of individual stocks and bonds. They are the source, the basic building blocks, of wealth management. And they don’t charge fees to own them. But there are other reasons to own individual stocks and bonds, especially for individuals who pay taxes.

Ensuring Tax Efficiency

Tax efficiency is important for personal or after-tax portfolios. Here, the manager of a portfolio of individual stocks and bonds can determine if, when, and how, he takes profits and losses in the portfolio, which in turn determines the capital gains taxes paid in a given year. The result of tax efficiency is, over time, less taxes paid. O’Brien Greene customizes the tax efficiency of each portfolio because each portfolio has only one owner, and we know the owner’s tax situation. Such customized tax efficiency is not possible at a mutual fund with hundreds of thousands of investors. indeed, mutual funds suffer from structural tax inefficiency Many fund owners experienced this in recent years, as they received capital gains tax bills even as the fund share price fell below their cost, Yes, if the fund management sells shares to pay for redemptions, everyone gets the realized gains, regardless of whether he owns the fund at a loss or a gain.

Low Portfolio Turnover

O’Brien Greene engages in relatively little buying and selling, which is called portfolio turnover. If the annual average is 100% portfolio turnover at the average stock mutual fund the figure at O’Brien Greene is 25%. High turnover drives up expenses, and, over the long term, has no corresponding benefit. In recent years brokerage commission levels have fallen dramatically, so much so that they are an immaterial expense. Wouldn’t this argue for higher turnover? It would if high turnover helped performance.

Socially-Conscious Investing

Reasonable people will disagree over what this term means. Thus one person may want to avoid pharmaceutical stocks because of their animal testing practices; another soft drink, fast food and ice cream stocks because of their health effects, and so on. The subject can get complicated in a hurry. Generally, we are able to accommodate a strong preference either for or against certain industry sectors. Certainly we want clients to be comfortable with their investments; we never lose sight of whose money it is. At the same time, we do not set out to find good-citizen stocks so we can invest in them. This seems backwards to us. Rather we look for stocks in businesses we like and understand, and that we think will make money. In our experience, a good stock tends to be a good citizen, but a bad citizen is never a good stock, at least not in the long term.

International Investing

O’Brien Greene & Co. tends to participate in international markets indirectly through the activities of the American companies it invests in. Thus the firm might own the common stock of Coca-Cola, which has extensive operations around the world, but the firm would not set out to own the stock or the bonds of an independent soft drinks company based, say, in Asia.

There are several reasons for this focus on America. One is regulatory oversight. America has the most extensive and effective securities regulation in the world Also, American accounting standards, which are predicated on accuracy before all other values, are the most dependable in the world.

Our favored direct approach to international investing is through the use of transparent, low-cost and tax efficient exchange traded funds (ETFs), which we use to complement our core stock holdings. In selecting country funds, we overweight countries with faster growing, more stable economies. Many individual country funds are heavily weighted in the stocks of leading companies within the country, which provides a vehicle for owning leading international stocks that might otherwise be more difficult to obtain.