Investment Management

Equities
Economic Evaluation and Sector Weighting
PacWest continuously monitors the economic conditions to determine weightings in each economic sector. Taking into account measures such as GDP, leading indicators, manufacturing and employment, we evaluate where we are in the economic and interest rate cycle. After compiling the information, a forecast is made of where we believe the economy is headed within the next year. With this forecast we decide on sector weightings, striving to out-perform the S&P 500.

Stock Screening Process
We begin with all publicly traded securities that meet a minimum capitalization size of at least $1 billion or the potential to reach $1 billion in the very near future. From there we screen for companies that meet our strict guidelines on earnings growth, revenue growth, cash flows, return on investment and return on equity. Also taken into account are differences between industries and sub-sectors within industry groups, as growth rates and factors that influence the stocks will differ.

These companies are further analyzed using the ranking system of Value Line and S&P. Both fundamentals and short-term valuations are used. Other factors including institutional ownership, insider-trading patterns, company stock purchase as well as rankings by Wall Street security analysts. Regression analysis based on trailing five-year earnings is used to estimate current and future values as well as long-term sustainable growth rates.

After having screened the companies, we then focus on valuation measures. The stock must be selling at a valuation that is attractive given its growth rate and intrinsic value relative to its peers. Finally, a buy target is set at an attractive entry point.

Buy and Sell Discipline
We are long-term investors. Therefore, trading in accounts is limited. However, we maintain moving averages and key technical support levels on the equities we own. Sell discipline is determined by valuation, position size, fundamentals of the company and technical analysis. If a stock has become over-valued based on its historical valuation and its valuation to the market, we will take profit and trim the position size. If the fundamentals of a stock are deteriorating and there is no turnaround in sight, then the stock is sold. If the company is charged with unethical deeds or the business environment has changed, then the stock is sold as well.


Fixed Income
Our objective in managing a fixed income portfolio is to generate a steady stream of cash flow and/or to minimize volatility. We build high quality bond portfolios with diversified maturities and credits for our clients. Both tax-free and taxable bonds are used to maximize the after-tax return of the portfolio.
The risks inherent in bond investing include interest rate risk, credit risk and reinvestment risk. These factors are the main determinants of bond pricing.

Interest Rate Risk
Predicting interest rates is an elusive game. Interest rates are affected by the Federal Reserve managing economic activity through monetary policy, central banks controlling currency valuations and global developments. Only the Federal Reserve can control money supply and the movement of short-term rates, while long-term rates are affected by inflation expectations of investors.

Interest rate risk is controlled through building a bond portfolio with diversified maturities. This diversification is known as a bond ladder. Taxable bond maturities are generally limited to 10 years. Tax-free bonds will have maturities less than 15 years. Unless one is actively trading a bond portfolio, holding long-term bonds introduces interest rate risk not in proportion to the incremental cash flow.

Credit Risk
Because our primary role as a fiduciary is to preserve wealth, PacWest does not take undue risk with the capital of our clients. Therefore, PacWest will only invest in investment grade rated securities or in government backed paper.

Bonds have to be rated A by at least one major rating agency to meet the criterion for investment. This gives a cushion for temporary weakness that may lead to a downgrade to the B category. If a bond is downgraded below investment grade, a thorough analysis will be conducted to determine whether the fundamentals are sound. If the downgrade is justified, the bonds will be sold.

Reinvestment Risk
Much of a bond's return is controlled by the coupon reinvestment. All things being equal, we prefer investing in bonds with a higher coupon to cushion the impact of rising rates and to generate more cash flow for reinvestment.

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