Types of Portfolios
Martinelli Portfolio Management, Inc. manages client accounts as “separate” accounts based upon the requirements of individual clients rather than as collective “pooled” accounts. Clients accounts are managed on a “discretionary” basis, meaning that clients confer upon us the authority to make investment decisions with respect to their portfolios and to direct transactions in their accounts.
Our design of clients portfolios is based upon information gathered concerning each client’s assets and individual financial requirements at the time a client account is opened. This information is updated periodically.
Based upon the information clients provide and upon our perception of the best ways to achieve the clients objectives, we generally allocate client assets among various asset classes. These include fixed income securities and securities with equity characteristics (including, but not limited to common stock, preferred stock, real estate investment trusts, energy trusts and partnerships, and convertible bonds).
For clients with a relatively small dollar amount allocated to fixed-income, we will generally invest in fixed-income securities indirectly through mutual fund (i.e., bond fund) shares. For clients with relatively large dollar amounts allocated to fixed-income securities, we may invest directly in some fixed-income securities along with fixed-income mutual fund shares. Depending on market conditions at a point in time, we may address the objectives of income-oriented clients with preferred stocks, dividend -paying equities and royalty trusts.
Although the vast majority of the securities comprising the portfolios we manage consist of publicly- traded securities, in appropriate cases and only when clients are both “accredited investors” as defined in Rule 501 under Regulation D of the Securities Act of 1993, as amended, and as a “qualified clients” as defined in regulations under Section 205 of the Investment Advisors Act of 1940, as amended. We have incorporated non-publicly traded “hedge funds” and private limited partnerships securities into client portfolios.
Clients may impose restrictions on our investing in certain securities (for instance, tobacco company shares) or types of securities (for instance, high yield bonds). No clients have ever done so.
Martinelli Portfolio Management, Inc. considers many investment alternatives when designing client portfolios including common stocks, preferred stocks, bonds, REITs, royalty trusts, limited partnerships and, not unimportantly, cash. Each client portfolio, however, is managed as an individual “separate account” (rather than as part of a pool of assets) and each has its own mix of securities from various asset classes. Notwithstanding the individualization of accounts, however, our experience has been that client risk and reward appetites fall into one of four broad categories:
Capital Appreciation Portfolios
For clients with a longer-term perspective, usually those who are building assets for retirement or whose immediate financial requirements are met from another source such as salary or rental income, we commonly invest with a view to capital appreciation.
Capital appreciation portfolios are normally composed largely of equity securities, primarily common stock and no-load equity mutual funds. Depending on investment conditions and client risk tolerance, there will be a component with a greater or smaller cash reserve and may be an allocation to bonds or no-load bond mutual funds.
Income-Oriented Portfolios
For clients with an immediate or near-term need to derive current income from their portfolio, usually retirees or clients who for other reasons may not be in the work force, we invest with a view to income-generation.
Income-oriented portfolios are normally comprised of Government and corporate bonds and no-load bond mutual funds, preferred stocks, royalty trusts, limited partnerships, and some cash. Given today’s low yields on interest bearing bonds, there is an increasing allocation to dividend-bearing common stocks, particularly those with a long history of increasing dividend payouts. In general, Income-oriented portfolios are less volatile than capital appreciation portfolios.
Balanced Portfolios
For clients who stand in the middle and desire both capital appreciation and income, we advise a Balanced Portfolio which combines elements of our capital appreciation and income-oriented portfolios. The “balance” of the mix is not fixed. It is structured to meet individual client requirements and is tactically adjusted depending on market conditions (i.e., when bond prices are high and yields low, we will be inclined to emphasize more equities and fewer bonds).
Bedrock Portfolios
For clients whose concerns about principal preservation and protection of the purchasing power of their financial assets outweigh their need for capital appreciation or income (usually clients with a high level of investment assets), we offer a “bedrock portfolio.” Focused neither on capital appreciation nor income, the bedrock portfolio is designed to minimize market volatility and to address concerns about deflation, inflation and the maintenance of “purchasing power.” Since inflation and deflation call for diametrically different strategies, bedrock portfolios are subject to ongoing, sometimes significant adjustments. Although the bedrock portfolio employs many of the same securities included in our other portfolios, it also emphasizes risk and volatility reduction through ownership of instruments which afford a measure of protection in down markets.
For clients who are “qualified clients” as defined under SEC regulations, we may recommend investments in “hedge funds” and other private investment partnerships which manage risk through “absolute return” strategies involving the use of “derivative securities” such as options, and “hedging.” In general, a “qualified client” is a person with who is $1,000,000 or more with a hedge fund or private investment partnership, or with a net worth, exclusive of such person’s primary residence, of at least $2,000,000.
Since all clients share concerns about capital preservation and the purchasing power of the dollar, the thinking on which the bedrock portfolio is premised influences our construction of all portfolios even though the emphasis is different and components of the bedrock portfolio are not available to all clients.