Capital Preservation for Religious-Based SRI
TWST: Please tell me about the company a little bit. How did it start?
Mr. Leylegian: Leylegian Investment Management, Inc., was founded in 1981 by our parents Dorothy and Jack Leylegian. Prior to founding Leylegian Investment, my father, Jack Leylegian, was the President of Bank of America Investment Management Company. Prior to that, he was the Senior Vice President of Dreyfus in New York; an economist, in his own right; and a very distinguished investment adviser. Both mom and dad are in the best of health, but they retired from the business in 1995.
There are two more Leylegians, myself, George and my sister Debra. I purchased the company from my parents in 1995, and am President and Chief Executive Officer. My sister, Debra, is the Vice President and Secretary of the corporation. Her two daughters have been summer interns while in high school and college, and we hope that they will assume the mantle as the third generation of the family to run the firm.
We provide investment advisory services to religious and religiously affiliated institutions.
TWST: Please explain for us the overall investment philosophy at Leylegian Investment Management.
Mr. Leylegian: First, middle and last is the preservation of capital. We are defined as a top-down, macroeconomically oriented investment advisory service. Each client is separately managed. Because the majority of our clients adhere to a specific doctrine or dogma, each account also reflects a commitment to social responsibility strategies.
TWST: When you say most important is not to lose capital, how does that translate into the day-to-day management of the accounts? What specifically does the firm do beyond the overall top-down approach?
Mr. Leylegian: Since inception, the cornerstone of our investment agreement with every client remains our ability to rotate from one sector to another, and at times, to shift equity exposure from 100% to zero. Taking you back to 1987 for a moment, in the spring time of 1987, we felt that the markets were quite overvalued, and we began very methodically and meticulously to take everyone from 100% in equities to zero in equities by September 30. So in October of 1987, when the market fell apart, all of our clients were safely in cash. We then went back in and purchased, in some cases, some of the same equities that we had owned at the beginning of the year, but for cents on the dollar.
We repeated the same strategy starting in the end of 1999, and so by the end of the first quarter of 2000, when, not coincidentally, the major indexes had all hit their peaks, our clients were all in cash, again. We have always sustained this flexibility, and respectfully, we will not accept the management of a portfolio which prohibits us from raising extraordinary cash levels when we deem it appropriate to preserve assets. We are an investment adviser, and depending upon prevailing economic and market conditions, our advice may vary from full exposure to zero.
At the moment, we are 95% in cash equivalents, and anticipate that when the major indexes capitulate, we shall have the opportunity to maximize our clients’ exposure to equities once again.
TWST: The firm proactively rotates clients’ assets through industry sectors. What does that mean and why do you do that?
Mr. Leylegian: We adhere to the prudent person theory of investments, which is that no more than 5% of a portfolio ought to be invested in a single company, and no more than 25% of the portfolio in a generally recognized industry. The sole exception is to rotate completely out of equities and to safeguard the assets in cash equivalents. We believe that diversification is one of the best defenses on the downside.
On the upside, we are keen to analyze inflation, interest rates and economic growth prospects, and then, rotate assets into those industries and companies, which ought to thrive in a particular cycle and business environment.
TWST: As you said, all the accounts are individual client accounts. Has Leylegian Investment Management ever been tempted to start a mutual fund?
Mr. Leylegian: No, not at all, I’m not that smart. Religious and religiously affiliated institutions have very particular doctrinal needs and requirements, and each is specific to the individual community. We have some clients that are pro-life, others that are pro-choice, some are pro-defense, some are anti-defense, so we cannot have a one-size-fits-all strategy, which would be more reflective of a mutual fund.
TWST: So when you first meet with a client, do you examine their doctrine and try to put together a portfolio based on that? How does it work?
Mr. Leylegian: It’s very interesting. There is a document, which I am sure that all of you have seen, which is called an investment guideline. The pages are filled with directions and parameters for the investment manager to follow, and are essential for a solid manager-client relationship. We like to take things a step further. We wish to be proactive with each client, and rather than focus only upon restrictions and objections, we wish to engage our clients to achieve their objectives.
It is relatively easy to create a list of companies which ought to be avoided, but honestly, what value can an investment adviser add to such a list? We, on the other hand, sit down with our clients and ask them, “When you wake up in the morning as a religious group, after you have offered your prayers, how can we collectively transform the raising up of hands to the extending of hands to good works? What is it that you wish to see accomplished through the application of your investments? Do you want to rid the world of hunger? Do you want to educate people? Do you want to provide health care to the infirm? What is your prayerful objective?” Based upon their answers, we are able to create an investment portfolio, which first, preserves assets; secondly, produces regular income to fund the good works; and third, that will consistently go hand in hand with their particular objectives.
TWST: How large is the average client portfolio?
Mr. Leylegian: We do not have a stated average client size. Many years ago, my dad created the chart for the company, which is based on time zones from California, at $5 million per time zone. The reason is that, unlike many other investments advisers, the telephone might be the most sophisticated technology that we have here. We do not use Web cams, we do not send text messages, and many of our clients still write letters by hand. We enjoy the opportunity to meet with our clients in person, to share a meal with them and to be a part of their worshipping community. Given today’s increased restrictions when traveling, it is not possible any longer to fly out and back in one day, hence the time zone grid to determine assets.
TWST: How do you manage risk in portfolio?
Mr. Leylegian: When I teach, I teach that risk is neither positive nor negative. It is naturally inherent in every decision. Actually, there is good risk in addition to bad risk. Most people want to concentrate on bad risks. What is the worst risk? It is to lose your health in addition to your wealth. We hope that by safeguarding a client’s wealth that it might contribute to a peaceful night’s sleep and a preservation of overall health and well-being.
So the first and, I believe, most important objective in managing risk is to preserve the principal. The second objective is to diversify the portfolio in order to manage against the downside risk of investments. The third objective is to constantly monitor macro- and micro-economic statistics in order to determine which industries might flourish and which might flounder at the turn into the next business cycle. When we are fully invested, the average portfolio only contains about 40 holdings. We believe that having too few companies in a portfolio may not limit the downside investment risk, while conversely, having too many companies in a portfolio might not deliver significant upside potential.
Finally, oftentimes there are silent risks to an investment portfolio. The primary silent risk is the consistent gnaw of inflation. How is the portfolio safeguarded to accommodate for the annual depreciation of value because of the rate of inflation? The second silent risk are the pension and retirement liabilities, which so many companies currently shoulder. Within the upcoming business cycle, how many of billions of dollars must corporations set aside in order to fund their long-term pension obligations, and how many of these companies may not be able to successfully meet these challenges?
TWST: Does Leylegian Investment Management invest in international companies, as well, or is it all U.S.-based names?
Mr. Leylegian: We occasionally purchase American Depository Receipts, ADRs. Furthermore, since the average United States company is doing anywhere between a quarter and 50% of its business overseas then, by definition, we are able to incorporate their multinational exposure into our domestic portfolios. For instance Coca-Cola (KO) sells its products to 160 countries throughout the world. They already have diversified their currency risks. They have diversified their infrastructural investments, and so when you are investing in a company like Coca-Cola, are you not, in point of fact, investing in a 160 different beverage companies around the world?
In addition, there are approximately 2,000 recognized company stocks on the New York Stock Exchange. We only have 40 in the portfolio. I feel more secure knowing that we are investing in companies which are required to submit all of their financial information to the Securities and Exchange Commission, to the Internal Revenue Service and must follow GAAP for audit purposes. So we prefer to maintain consistent due diligence on behalf of our clients, and believe that we might manage risk more confidently when relying upon the financial reporting standards here.
TWST: Based on the macroeconomy, where do you see the biggest opportunities right now?
Mr. Leylegian: Short term, I am quite concerned that the current market is very overvalued, and so I am remaining very cautious and staying in cash. I am expecting a major pullback in equity valuations and prices within the upcoming 12 months. By 2013, we anticipate higher rates of inflation, and so the upcoming economic cycle of this country could actually benefit those industries and companies in those industries which tend to flourish in an accelerating inflationary environment.
The United States has come off of 10 years of disinflation, and in some industries, total deflation; and now, it’s time to begin the re-inflation process. This means a completely different environment and a completely different focus. We expect the equity markets to correct themselves, and we are looking for somewhere between a 40% and 50% downside from current levels — this could be quite dramatic. Not all stocks fall at the same pace, and some of them could be literally decimated. At that point, if we can acquire these stocks at cents on the dollar, and then, hold on to them through the upcoming re-inflationary cycle, then we could achieve returns for our client, which are measured in multiples, not just in percentages.
My long-term perspective of the United States is very positive. Over the past decade, this country has endured a period of serious and severe retooling and recouping and reorganizing. In the 1990s, a tremendous amount of excess was built up in the system, and that excess needs to be soaked up. Many industries are still in the process of doing the soak up, but we are confident that the bulk of the hard work has been accomplished.
TWST: When you say long term, what time frame are you looking at? How long will a turnaround take?
Mr. Leylegian: For the domestic economy, I would give it a good three years for certain industries, though many of them have already spent the last three to five years going through just horrific reorganization. We see it in the unemployment numbers. We see it in the fact that so many households continue to struggle. We are familiar with the expression “lean and mean.” We believe that the “mean” part of reorganizing is nearly finished, and now the “lean” part is emerging.
Any incremental increase in topline growth and sales revenue could now translate into exponential corporate earnings. Many of these companies are better positioned at the moment financially. I admit that I am an old-fashioned, statistical type of person, and therefore, I focus upon price-to- earnings, price-to-book value, sales-to-inventory and other ratios when determining overall corporate financial health. Many companies have drastically pared back on all of their inventories with the expectations that in the upcoming re-inflation cycle, and a little bit of a push by consumer demand could jump-start operations to fill the sparse shelves. This could create a wonderful opportunity here in this country.
TWST: Please tell us about your background.
Mr. Leylegian: Thanks to my parents, I have been fortunate to obtain degrees in business, law and theology. I believe that the combination of these academic studies allows me to respond to so many of our clients’ expectations in terms of my accounting skills, my economic skills, my compliance skills, my auditing skills and my ability to participate within religious community life.
TWST: How long have you been with the company?
Mr. Leylegian: I joined part time in 1982, while completing my graduate work, and full time in 1985. I became President in 1995.
TWST: Is there anything you would like to add?
Mr. Leylegian: Yes, thank you. We spend a tremendous amount of time analyzing, not only the United States’ economy, but also in determining where the United States economy is in the context of the global economy. Apropos to the comment about what I see happening, I am sorry to say that 2012 is probably going to be the worst year in this cycle. The GDP rates are slowing down all over the world, and this could be a very, very difficult year for most nations and most industries throughout the world. There are some companies which have stalled making difficult decisions, but I think this year they must face the challenges and make those difficult decisions. Consequently, I do not expect that unemployment would improve over the next six to 12 months, nor that domestic production would accelerate in the next six to 12 months.
Regardless of who is elected as President of United States, by 2013, we expect a general percolation of inflation worldwide. Some $1.5 trillion to $2.5 trillion of fiat currency has been pumped into the domestic economy for various financial and political reasons. Inflation is generally created when there are too many dollars used to acquire the same cup of coffee. Starting in 2013, I think that we may begin to see inflation starting to rise. Higher inflation could be a boon for the housing industry, which in turn, should ease certain household debt burdens, and provide more stabilization to home values. A little bit of inflation can be a good thing because it tends to indicate an increase in demand for goods and services.
A resumption of production in the domestic economy should alleviate unemployment and restore consumer confidence. Since the United States is acknowledged to be the giant in the world economy, if we can improve ourselves, then the rest of the world should also begin to improve. So I think long-term prospects are very positive. Could we hit some bumps in the road? Absolutely. Might more banks and businesses go out of business? Absolutely. Could companies and households still enter into bankruptcy? Absolutely. We must remember that even in the best of times, through economic evolution and technological improvements, some companies are still not able to stay in business. But for those industries which are willing to make the necessary changes to retool and to recoup and to reorganize, the future is quite positive and profitable. We look forward to working with our clients to invest their assets prudently and responsibly through many decades of changing economic cycles.
TWST: Thank you. (LMR)
George A. Leylegian
President, CEO, Treasurer & Chairman
Leylegian Investment Management, Inc.
P.O. Box 1028
Menlo Park, CA 94026
(650) 322-8902 — FAX