Howe and Rusling Investment Process
Investment professionals typically construct and manage investment portfolios using a bottom-up process, a top-down process, or a combination of both.
Bottom-Up Process – Starts with Analysis of Individual Industries and Companies
A bottom-up process relies on analysis of individual companies and industries, selecting those that fit the investment strategies or preferences of the investment manager. This philosophy is based on the belief that companies with sustainable competitive advantages can do well even if the economic environment changes. Additionally, a bottom-up manager typically calculates a value for each business that is analyzed, with the goal of buying businesses that are trading for less than the calculation of intrinsic fair value.
Top-Down Process – Starts with Macroeconomic Analysis
A top-down process is based on the “big picture,” which is a view of the economic and political environment. Securities are selected based on how well they fit with the overview. The data considered in a top-down process typically includes a wide range of economic, market, and policy data that help assess economic growth, financial conditions, inflation, valuation, and overall market risk.
Management of Individual Stock and Bond Portfolios
While bottom-up and top-down processes are not mutually exclusive, at Howe and Rusling, we primarily construct investment portfolios that hold individual stock and bond securities using a bottom-up process. However, we also spend significant time monitoring macroeconomic conditions. Our assessment of macroeconomic factors may inform decisions on highly cyclical stocks, for example.
Management of Exchange Traded Fund Portfolios
In contrast, management of portfolios invested in exchange traded funds relies on our assessment of top-down factors such macroeconomic conditions, political and regulatory conditions, industry conditions, and valuations.
Howe and Rusling Equity Investment Strategies
At Howe and Rusling, our bottom-up process for selecting stocks is built on the four investment strategies below. All stocks that are purchased in Howe and Rusling’s Core and EIP portfolios must fit one of these investment strategies. While we generate some ideas from quantitative screens, many of our investment ideas are a byproduct of our research on industries, new technologies, and emerging trends.
Secular Grower with Sustainable Competitive Advantages
For a company to align with this strategy, we look to purchase businesses that we believe possess a strong and sustainable competitive position within their industry that may support long-term profitable growth. These companies are often characterized by growth rates that exceed broader economic trends over time.
Factors that may lead to a strong and sustainable competitive position include a strong brand, economies of scale (their large size and dominant market position is an advantage), economies of scope (their large breadth of products or services is an advantage), network effects (value of the service to customers grows as more customers use the service), high costs for new competitors to enter the market, and high costs for customers to switch to a different product or service.
Slow Grower with Sustainable Competitive Advantages
When we buy companies fitting this strategy, they have one or more of the characteristics described above but we also believe these companies will have less growth due to maturity of their industry.
Industry Cyclicals with Sustainable Competitive Advantages
Companies fitting this strategy have one or more characteristics of the businesses fitting the strategies above, except industry cyclicals’ growth rates and profitability are significantly impacted by the economic cycle or their specific industry cycle. Recurring revenue and high switching costs are two important characteristics of industry cyclicals that may help soften pressure on profits during a downturn. We seek companies that have demonstrated the ability to generate positive returns on invested capital over time that we belief will remain positive through the business cycle. While industry cyclical companies may be held over longer periods, purchase decisions may take into account prevailing industry conditions, including periods of relative weakness, based on our assessment of valuation and forward-looking prospects.
Cyclical Conditions Trade
Companies fitting this strategy are primarily driven by macroeconomic conditions and their industry cycle. Therefore, industry conditions need to be analyzed along with cyclical swings in sales and profit margins. This is a contrarian investment strategy where stocks are purchased when profits are under pressure and sold when profit margins improve. Unlike the three prior investment strategies, stocks purchased under this strategy may be held for a shorter time, dictated by macroeconomic and industry conditions rather than primarily a bottom-up assessment of an individual business.
Howe and Rusling’s Valuation Discipline
We do not target a particular weighting to any of the strategies described above, rather, we make new purchases opportunistically based on what we believe is underpriced vs. our estimate of a company’s intrinsic value. We estimate the intrinsic value of stocks purchased in portfolios based on a forecast of future earnings and cash flow. We also evaluate a stock’s upside and downside potential by considering both bull case and bear case scenarios – what a stock could be worth if the outlook is better or worse than our baseline expectations. We will only purchase a stock if it is trading for less than our estimate of intrinsic value.
Howe and Rusling’s Risk Management Process for Equities
For both our Core and EIP portfolios, we typically hold 30-50 stocks, which fluctuates based on the number of stocks that we believe fit our investment strategies and are trading below fair value. In addition to our investment strategy and valuation discipline, we seek to manage risk by monitoring position sizes, sector exposure, portfolio volatility, and key valuation and business quality measures. Portfolio holdings are actively monitored and underperforming stocks are reviewed to assess whether the strategy fit and original investment thesis remain aligned with new facts and assumptions.
Fixed Income: Preservation and Income
Our fixed income process is designed to support capital preservation, liquidity, and income generation, while aligning with each client’s objectives, risk tolerance, time horizon, and any applicable tax considerations. We use a top-down and bottom-up framework to manage portfolios across market cycles.
Top-Down: Duration and Yield Curve Positioning
We analyze Federal Reserve monetary policy, inflation, economic conditions, and yield curve dynamics to guide decisions on duration (sensitivity to interest rates) and maturity positioning of our fixed income portfolios.
When market conditions support it, we may try to extend duration to capture higher yields.
When rate or volatility risks are elevated, we may emphasize shorter maturities and liquidity.
We also adjust sector exposure based on relative value and risk conditions.
Bottom-Up: Credit Analysis and Security Selection
We focus primarily on high-quality corporate, municipal, government, and agency securities. Security selection is based on relative value, liquidity, and issuer fundamentals, with an emphasis on investment-grade quality and downside risk awareness.
When evaluating corporate and municipal bonds, we review factors such as:
- Credit ratings and outlook trends
- Leverage (indebtedness), cash flow, and interest coverage metrics
- Debt structure and refinancing profile
- Trading liquidity and market technicals
- Embedded option risk (for callable structures)
- Spread levels versus Treasuries and historical ranges
Our research process incorporates internal analysis and external sources, including rating agency commentary, broker research, market indicators, and issuer-specific developments.
Portfolio Construction and Risk Management
Portfolio construction emphasizes diversification across issuer, sector, and maturities, supported by a disciplined fixed income portfolio management process, along with the monitoring of interest rate risk, credit risk, and call/extension risk.
For liability-sensitive portfolios, we place additional emphasis on liquidity, cash flow planning, and laddered maturities in an effort to help meet expected and unexpected distributions.
Trading and Ongoing Oversight
We seek best execution through an approved broker network and monitor holdings as market conditions and issuer fundamentals evolve. Fixed income positioning is reviewed as part of our broader investment oversight process and adjusted when appropriate.
Howe and Rusling Asset Allocation Process
Our investment team meets monthly to discuss macroeconomic conditions, policy changes, and investment valuations. During these meetings, we discuss the relative weighting of stocks and bonds in portfolios. Asset allocation may be adjusted over time based on our assessment of changes in the economy, policies or valuations.
Conclusion
At Howe & Rusling, our investment philosophy is rooted in thoughtful research, collaboration, and long-term perspective. By combining bottom-up security analysis with ongoing awareness of broader economic conditions, our team works to make portfolio decisions deliberately and consistently. While markets will inevitably change, we believe a disciplined and team-oriented process can provide a measured framework for navigating uncertainty and help support clients as they work toward their long-term financial goals.
Disclosures: Howe & Rusling, Inc. (“H&R”) is an SEC-registered investment adviser. Registration with the Securities and Exchange Commission does not imply a certain level of skill or training. This material is provided for informational purposes only and is intended to describe H&R’s general investment philosophy and process. It is not intended as investment advice or as a recommendation to buy, sell, or hold any particular security, strategy, or investment product. Any references to specific characteristics, investment approaches, or evaluation criteria are illustrative in nature and do not represent all factors used in investment decision-making. All investing involves risk, including the possible loss of principal. There can be no assurance that any investment strategy described herein will achieve its intended results, outperform any benchmark, or avoid losses. Past performance, if referenced elsewhere, is not indicative of future results. Statements describing beliefs, expectations, or views regarding markets, economic conditions, competitive advantages, intrinsic value, macroeconomic trends, duration positioning, yield opportunities, or forward-looking prospects are based on current opinions as of the date of publication and are subject to change without notice. Forward-looking statements are inherently uncertain and actual results may differ materially. References to the collective years of experience of the investment team reflect aggregate industry experience of current team members. Such experience does not guarantee future performance or investment success. Descriptions of bottom-up and top-down processes, valuation methodologies, competitive advantages, macroeconomic analysis, intrinsic value estimates, and portfolio construction frameworks are intended to illustrate H&R’s general approach. Actual portfolio construction and investment decisions may differ based on client objectives, risk tolerance, tax considerations, liquidity needs, regulatory constraints, and other relevant factors. The categorization of investment strategies (including but not limited to “Secular Grower,” “Slow Grower,” “Industry Cyclicals,” or “Cyclical Conditions Trade”) reflects internal research classifications and may change over time. Not all client portfolios will contain securities from each category, and allocations to strategies may vary. Intrinsic value estimates, bull and bear case scenarios, and other valuation analyses are based on internal models and assumptions that may prove inaccurate. Securities purchased at a perceived discount to intrinsic value may not appreciate and may decline in value. Equity investments are subject to market risk, business risk, sector risk, liquidity risk, valuation risk, and other factors that may cause price volatility and potential loss of principal. Concentrated portfolios, including portfolios holding approximately 30–50 stocks, may experience greater volatility than more broadly diversified portfolios. Monitoring of position sizes, sector exposures, volatility, and other risk measures is part of H&R’s process; however, risk management techniques do not eliminate the risk of loss. Fixed income investments are subject to interest rate risk (including duration risk), credit risk, default risk, call risk, extension risk, liquidity risk, reinvestment risk, and inflation risk. Bond prices generally fall when interest rates rise. Extending duration to capture yield may increase sensitivity to interest rate movements and price volatility. Emphasizing shorter maturities may reduce interest rate sensitivity but may also limit income potential. Investment-grade ratings reflect the opinion of the rating agency and are subject to change. Ratings do not eliminate credit risk. Municipal bonds may be subject to legislative, tax, or issuer-specific risks. U.S. government securities, while generally considered to have lower credit risk, are not guaranteed against price fluctuation. Asset allocation does not assure a profit or protect against loss in declining markets. Changes to asset allocation are based on H&R’s assessment of market conditions and may not produce the intended outcome. Exchange-traded funds (ETFs) are subject to market risk, tracking error risk, liquidity risk, and underlying portfolio risks. ETF shares may trade at a premium or discount to net asset value. Any discussion of tax considerations is general in nature and not intended as tax advice. Clients should consult their tax advisor regarding their specific circumstances. Investment strategies and portfolio construction decisions are implemented based on each client’s Investment Policy Statement, objectives, financial circumstances, and constraints. Not all strategies are appropriate for all investors.
