Investment Strategy Overview
Our Large Cap Equity strategy invests in companies with sustainable competitive advantages and compelling valuations with the perspective of a long-term business owner. We seek companies that are industry leaders operated by skilled and shareholder-friendly managers to provide consistent revenue and earnings growth. We evaluate each company’s growth prospects and appropriate value. Given our long-term perspective, earnings growth has the opportunity to compound and portfolio turnover is low. Client portfolios are constructed with 25 to 30 companies. We seek to stay fully invested to capture the superior returns associated with equity investing.

The Investment Process

Through the investment team’s collective body of knowledge, we identify 100 – 200 companies that we consider as industry leaders that have attractive financial characteristics. Company names are added and removed as conditions change.

The team then uses traditional fundamental analysis to identify 40 to 60 companies with understandable and sustainable competitive advantages such as pricing power, strong brand, or a unique corporate culture. These companies have the following attributes:

  • A strong management team that has demonstrated their ability to allocate capital effectively and to the benefit of shareholders.
  • Attractive financial characteristics
  • Identifiable revenue and earnings per share growth

Macro level issues are considered and contribute to our fundamental analysis. Our investment strategy looks beyond near-term economic data and forecasting of market movements. We consider the long-term macro trends and analyze the effects on different industries and businesses.

We seek to invest in companies at compelling valuations.
An intrinsic value is calculated for each company that we consider for purchase. We add new companies to the portfolio only when we believe they are trading at discounts to their intrinsic values.

Portfolios are constructed with 25 to 30 companies. These relatively concentrated portfolios provide the benefits of diversification yet allow each company to contribute meaningfully to performance. The team invests with a long-term owner’s perspective to provide the time required to achieve expected value. Historically, turnover has ranged from about 5% to 20% per year (5% in 2017, 1% in 2016 and 13% in 2015.)

Sell Discipline

Performance at the portfolio and security level is monitored closely. Company performance is monitored regularly to determine if the investment thesis is in place and the return potential compares favorably to potential risks.

During the purchase process, the investment team establishes an investment thesis for each company in our portfolios. Additionally, the team identifies key metrics and potential risks to monitor. The sell discipline is the mirror image of the purchase process. Should new information violate the investment thesis or call into question key metrics or risk assessments, the team will investigate further to determine if a sale or allocation reduction is warranted.

The investment team will sell a company if their investment thesis is violated, which means there has been a deterioration in fundamentals and/or the valuation reduces the risk/return profile. Additionally, a company may be sold to make room for a stronger company with a more attractive valuation.

We take a disciplined approach to investment research and employ an investment selection process that seeks to reduce risk at both security and portfolio levels. Our equity investing is driven largely by our best ideas rather than overall market movements.

Many investment managers think in terms of the next quarter or the next year when selecting an investment, and their average holding periods tend to be from several months to one or two years. Since we are long term oriented investors, we believe our performance numbers are most meaningful over longer periods of time. In our analysis of a business, we are thinking in terms of five to ten years and our average holding period for a stock is well over 10 years.

Key Facts

  • Employs a consistent, disciplined approach that focuses on high-quality companies with competitive advantages that are distinctive and not easily replicated
  • Seeks companies that are industry leaders operated by skilled and shareholder-friendly managers to provide consistent per share earning and cash flow growth. These companies include the following characteristics:
  • A strong management team
  • A sustainable competitive advantage
  • Proven earnings performance over a full market cycle
  • Solid balance sheets
  • Superior cash flow
  • Seeks to continuously reduce risk by only purchasing companies at compelling prices, which may increase both return potential and the margin of safety
  • Constructed with 25 to 30 companies, distilled from the universe of 500 companies in the benchmark
  • Portfolio turnover is low, with a 5-year average of 6%, which leads to a tax efficient strategy
  • Portfolio characteristics have shown lower volatility than the equity markets overall

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At Hilliard Lyons Trust Company, we seek to achieve above-average investment performance over extended periods. We have built our investment strategy with long-term investment excellence as our goal. While much of Wall Street today is focused on trading around the next quarterly corporate earnings’ reports, the next move by the Federal Reserve on interest rates, or the next change in the price of oil, we take a much different approach. We don’t think of shares of stock as trading chips to be shuffled around. Rather, we think the stock market gives investors the opportunity to be a long-term owner of a share of a business. Our experience over many years has been that wealth creation and enhancement generally results from owning outstanding businesses over the long-term.

Hilliard Lyons Trust Company, LLC. Large Cap Equity SMA Composite Annual Disclosure Presentation
Compliance & Verification
The Large Cap Equity SMA Composite was created October 1, 2005. A performance certification of this composite has been conducted by Ashland Partners and Company, LLP for the period of January 1, 2009 through June 30, 2016 and by ACA Performance Services, LLC for the period of July 1, 2016 through December 31, 2016.
The Firm
Hilliard Lyons Trust Company, LLC (HLTC) is owned by HL Financial Services LLC (“HLFS”), which is owned by Houchens Industries, Inc., employees, and a limited number of outside investors. HLFS also owns J.J.B. Hilliard, W.L. Lyons, LLC (“Hilliard Lyons”). In 1998 The PNC Financial Services Group, Inc. (PNC) acquired Hilliard Lyons and the original Hilliard Lyons Trust Company. The original Hilliard Lyons Trust Company was merged into PNC Bank, NA, but continued to operate as a separate division doing business as Hilliard Lyons Asset Management. In August 2007, HLCM was formed to provide institutional money management as a registered investment advisor and to house the investment manufacturing capabilities of Hilliard Lyons Asset Management (HLAM); it did not begin operations until March 2008. In March 2008, PNC sold Hilliard Lyons, HLCM and a newly formed Hilliard Lyons Trust Company (which continued the trust business of HLAM) to HL Financial Services, LLC. On April 8, 2011, HLCM closed and certain assets were transferred to HLTC.
The Composite
HLTC’s Large Cap Equity strategy focuses on investing in companies with sustainable competitive advantages and compelling valuations with the perspective of a long-term business owner. Identified through fundamental analysis, the companies in our Large Cap Equity portfolio are industry leaders providing consistent revenue and earnings growth that are operated by skilled and shareholder-oriented managers. The Large Cap Equity SMA Composite contains fully discretionary tax-exempt Large Cap Equity separately managed accounts. Prior to January 1, 2015 the composite contained both taxable and tax-exempt clients. For comparison purposes the composite is measured against the S&P 500 Index. In reports shown prior to January 1, 2007 the composite was compared against the Russell 1000 Value Index. The benchmark was changed to more accurately reflect the strategy of the composite. The minimum account size for this composite is $100 thousand. Prior to October 1, 2005 performance represents that of the Large Cap Equity Composite which is also measured against the S&P 500 Index. The minimum account size for the Large Cap Equity Composite was $2 million. Prior to September 30, 2007 the composite was known as the Large Cap Value SMA Composite. Prior to July 1, 2004 this composite was known as the Institutional Value Composite. The name was changed to better reflect the composite strategy. Additional information regarding the Large Cap Equity Composite is available upon request.

The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of fees and include the reinvestment of all income. Beginning October 1, 2005 wrap fee accounts make up 100% of the composite. For this period forward, gross returns are shown as supplemental information and are stated gross of all fees and transaction costs. Net returns are reduced by all fees and transaction costs incurred. Prior to October 1, 2005 net results have been reduced by the highest annual wrap fee of 2.75%. Accounts in the composite pay an all-inclusive wrap fee based on a percentage of assets under management. Other than brokerage commissions, this fee includes investment management, portfolio monitoring, consulting services, and in some cases, custodial services. Prior to October 1, 2005, performance presented represents that of the Large Cap Equity Composite, which did not include wrap fee accounts and gross performance was reduced by transaction costs.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. For periods August 2007 through April 8, 2011 Hilliard Lyons Capital Management, LLC was used as a sub-advisor for implementing the Large Cap Equity strategy. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Composite policy requires the temporary removal of any portfolio incurring a client initiated significant cash inflow or outflow of at least 15% of account value. Prior to January 1, 2010 a significant cash flow was defined as 5% of composite assets.
Prior to November 1, 2004, settlement-date and trade-date valuations were used to calculate performance. Wrap fee schedules are provided by independent wrap sponsors and are available upon request from the respective wrap sponsor. Actual investment advisory fees incurred by clients may vary. Prior to October 1, 2005, carve-outs were included in this composite. Performance reflects required total segment plus cash returns using a pro rata cash allocation. As of September 30, 2005, 13% of composite assets were comprised of carve-out segments. HLTC maintains a complete list and description of composites, which is available upon request.

Additional Information: Past performance is not indicative of future results.
HLTC Large Cap Equity Strategy