Long Only Investment Strategy
Selective purchases positions in Selective Companies exclusively through either straight stock purchases, covered calls, or call options.
Straight Stock Purchase
This is the primary, preferred, and dominant purchase position at Selective. Straight stock purchases range between 3-15% of portfolio assets at cost. The position size depends on the quality of the business as it relates to the current discount to its intrinsic value. The greater the discount, the larger the position.
As a stock declines in price, assuming the quality of the business remains intact, Selective will increase the position size using dollar-cost averaging.
Initial stakes in Selective Companies are occasionally acquired though a covered call position. A covered call position ranges between 3-5% of portfolio assets at cost. When utilizing a covered call, Selective targets covered call positions with a maximum pre-tax gain of at least 12%, downside protection of more than 15%, a duration of greater than 1 year, and an effective purchase price well below intrinsic value.
Covered calls allow exposure to Selective Companies with a lower cost basis and an appropriate annualized return.
On very rare occasions, Selective will purchase call options with an expiration date of more than 18 months. Events such as the Great Recession, where there was widespread fear and panic in the market, are seen as buying opportunities. When these rare opportunities occur, call options range between 0.1% to 3% of portfolio assets at cost.
Call options are utilized to gain additional exposure to Selective Companies with what we believe have a strong potential for substantial returns.