FAQs
SCM offers the highest quality of wealth management products and services. The following frequently asked questions provide important information on Stephens unique investment approach.
Q. Can you explain in more detail the creation of your proprietary index?
A. We believe that the Federal Reserve monetary base is the best indicator of future inflation, and therefore, analysis of the base is essential to the index. Some investment professionals will claim that monetary aggregates, M1, M2 or M3, provide acceptable numbers on which to determine inflation. We disagree. The monetary base is the primary component upon which all monetary aggregates are built, and we recognize that the aggregates have other collective data that destroy their usefulness.
We begin with the monetary base number and, after smoothing out its data with a three-month moving average, we compute the trailing 12-month rate of change. That number will have an impact on inflation approximately two years into the future.
It is important to note that the monetary base is not the sole determinate of inflation. Inflation is strongly influenced by significant changes in oil prices. Oil prices do not have a lag like the monetary base does - oil has a concurrent impact. We do not attempt to estimate oil prices almost two years into the future. Instead, we focus our efforts on building scenarios based on prices going up, down or staying constant. We run our formula forward and it shows us the direction in which inflation is likely to trend.
Q. Why does SCM focus its research efforts on one specific sector?
A. There are many strategic advantages to solely buying government bonds. We have AAA portfolios that are not affected by the credit risks that so many of our competitors currently face. By selecting only government securities that are non-callable, we ensure that bonds can reach maturity and can maximize gains. We outdistance investment professionals who buy callable corporate paper or mortgage-backed securities that lose maturation when people pre-pay home mortgages. Our strategy is able to avoid the risks of a portfolio downgrade or an overestimation of corporate earnings.
To sum it up in the most basic of terms: Government AAA bonds allow us to capture higher results with less risk - and it is an appealing proposal to our client base.
Q. What is the biggest challenge in managing AAA government bonds?
A. The heart of the challenge is forecasting interest rates, which a large segment of the population does not believe is possible. Many people think interest rate changes are random events. However, we have disproved this notion by building a 12-year audited track record of superior performance based on our forecasting strategy. Our ability to accurately assess interest rate changes stems from the collective experience and knowledge of Stephens' Fixed Income Executive Committee, which meets on a daily basis to discuss market trends. We are both active members of the committee and participate in all levels of decision-making.
Q. What makes Stephens Capital Management's product distinct?
A. All of the issues mentioned above really show the distinct nature of an SCM portfolio. We utilize only the highest quality bonds, thereby limiting credit risk. We buy non-callable Treasuries and agencies that create maximum gains in a falling interest rate environment. We eliminate long maturity risk by investing in government securities of less than 10 years. Finally, we do not use derivatives.
Q. Excellent returns aside, why else would investors be interested in your product?
A. We are a hands-on investment management organization, dedicated to providing the highest level of customer service. We are always accessible to our clients, and we generally encourage clients to speak with SCM's decision-making portfolio managers as often as needed. In addition, we are always available to meet with investment committees or boards at a client's discretion.
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