Money management is a little bit like playing the guitar: you need to know the fundamentals but no matter how good you get, you never stop learning.
That’s according to Adam Abelson, amateur guitarist and chief investment officer and senior portfolio manager at New York City-based Stralem & Company.
‘You’re never too old to learn, especially when it comes to finance because it adapts so much to the world around it. Guitar is kind of like that too: going from 12-bar blues to something more jazzy is a very complex leap,’ he said.
‘Just like how you can’t play jazz without knowing the blues, you can’t understand a bank’s cash flow statement without understanding something less complex like an industrial company, because there are certain levels of complexity and you have to keep at it.’
Stralem & Company was founded in 1966 by Donald Stralem and Abelson’s father, Hirschel, who were both investment bankers looking for a different opportunity. The firm was founded to manage high-net-worth and private client wealth, with a goal of wealth preservation.
The duo launched a ‘friends and family’ mutual fund in 1973 for retail clients and in 2000, as the firm started to attract some smaller institutional clients, the fund changed from a blended multi-asset fund to an all-equity strategy, called the Stralem Equity fund.
Adam Abelson joined the firm in 1997 when he began working on a portfolio with one of the partners. He became a senior portfolio manager in 2006 and was made chief investment officer in 2011.
Today, the firm has around $805 million in assets under management, most of which is in separately managed accounts. Of that total, $137.7 million is in the Stralem Equity fund, which is also available in an Ucits vehicle for European clients.
Its flagship US large-cap equity strategy is managed by Abelson and his father, who is also chairman of the firm, portfolio manager Mike Alpert and president Andrea Baumann Lustig. They are supported by three analysts.
‘Hirschel and I have more of a top-down macro view and the other guys have more of a bottom-up view, so the beauty of the team is that we can see things through different prisms and arrive at the same place from different starting points,’ Abelson said.
The team’s analysis begins with the S&P 500 and whittles down the universe to anywhere between 25 and 35 best ideas. Holdings are then split into two sectors: up market stocks, which are expected to grow capital when the market is rising, and down market stocks which have a history of preserving capital when things go sour.
The group uses balance sheets and earnings statements to identify companies that have the ability to grow capital. Abelson goes on many trips each year to visit these companies, evaluating the quality of management at any given business.
The group’s quantitative system for stock selection and risk management gives signals when a company has higher rates of growth based on its three-year geometric growth rate compared with its forward multiple. It also highlights when prices are increasing ahead of projected growth.
One of Abelson’s favorite buys has been Adobe, which transitioned its products from a flat-fee to a monthly subscription. He explained that it went through two years of subdued earnings during this period because it was switching gears.
‘By seeing this really strong growth value and realizing that 86% of their revenue is from recurring sources which is very stable, enabling a higher valuation, we were able to buy it before the market considered it,’ he said.
‘The model helped us see where these numbers should be if you smoothed out the two-year dip in its earnings and that’s been a wonderful story for us.’
However, selling a winner can be difficult. ‘Knowing when to recognize gains, when to take money off of the table and when to move on from a growth idea is best accomplished by having some kind of quant overlay that says “Hey, you might like this but you’re paying too much for this growth,”’ Abelson said.
He named General Electric as an example of such a stock. He added the company when China joined the World Trade Organization, but sold it a year and half ago when the company announced it would split off GE Capital, and as China’s growth slowed and energy collapsed.
‘You see this company that is one of the best run companies in the world but you’re not getting paid to own it anymore, so we sold it a year and half ago and it has gone down ever since,’ he said.
‘Our model allows you to see what the future holds before it arrives, because that stock was still going up at the time.’